The cross-option agreement we signed two years too late

He survived, which is the first and most important thing. He was back at work part-time within four months and full-time within seven, and the business is still two-handed today. But for about six weeks nobody knew that was how it would go, and in those six weeks I discovered exactly how much of our company's future rested on two people getting on and neither of them dying.

We owned it fifty-fifty. There was no shareholders' agreement. The articles were the model articles, unamended, filed at incorporation and never looked at again. What follows is what we found out, what we put in place afterwards, and the one clause our first draft got wrong in a way that would have cost his family a great deal of money.

What actually happens by default

Start with the uncomfortable version, because most owner-managed companies are sitting in it.

If a shareholder dies, their shares are an asset of their estate. They pass under their will, or under the intestacy rules if there is no will, to whoever inherits — typically a spouse. Nothing in company law obliges that person to sell, and nothing obliges the surviving shareholder to buy. So the day after the funeral, you are in business with your late partner's spouse, who may have no interest in the company, no knowledge of it, and an entirely reasonable desire to convert 50% of a business into money for their family.

The unamended model articles do not solve this. They contain no pre-emption right on transfer for a private company limited by shares, and no compulsory transfer on death. Directors have a power to refuse to register a transfer, which sounds useful and is not, because refusing to register the transfer does not stop the beneficiary being entitled to the shares — it just leaves everyone stuck.

At fifty-fifty, stuck is the operative word. Two shareholders with equal holdings and no agreement is a deadlock waiting for a disagreement, and grief is not a good context in which to have your first one. It is the same structural problem, in a more serious register, as the partnership nobody wrote down.

Cross-options, and why not a straight buy-sell

The standard answer is a cross-option agreement, and it is elegant once you see it.

Each shareholder grants the other an option. On the death of one, the survivor has an option to buy the deceased's shares, and the deceased's personal representatives have an option to sell them to the survivor. Either side can exercise within a defined window — commonly six or twelve months — at a price set by a valuation mechanism written into the agreement. In practice, both sides almost always want the transaction to happen, so the options get exercised and the shares change hands cleanly.

It is funded by life assurance. Each shareholder takes out a policy on their own life for roughly the value of their holding, written in trust for the other shareholder (or held under a business trust), so that when the money is needed it is paid to the person who needs to buy, quickly, and outside the deceased's estate for inheritance tax purposes. The survivor buys the shares; the family gets the cash; nobody has to find a buyer in the worst month of their life.

Our solicitor's first draft did something subtly different and much worse. It said that on death the personal representatives *shall sell* and the survivor *shall buy*. That is a binding obligation on both sides, and it is a mistake with a very specific price tag.

An obligation to sell and an obligation to buy is a contract for sale. A pair of options is not. The difference is invisible in the drafting and enormous in the tax.

The business relief trap, with the numbers

This is the clause worth understanding properly, because it is the reason cross-options are drafted as options rather than obligations.

Unquoted trading company shares can qualify for business relief from inheritance tax. But HMRC's guidance is explicit that where an agreement requires the deceased's shares to pass to their personal representatives and requires those representatives to sell to the surviving shareholders, who are obliged to buy, that is a "buy and sell" agreement — a binding contract for sale — and it prevents the shares qualifying for business relief. If one side is bound to offer and the other bound to purchase, relief is denied. By contrast, an arrangement where the shares fall into the estate with an option for the survivors to purchase does not constitute a contract for sale and does not prevent the shares qualifying.

So the drafting choice between "shall" and "may" changes the tax treatment of the single largest asset either of us owns.

Here is the shape of it, using illustrative figures. Take two equal shareholders in a trading company valued at £3 million, so each holding is worth £1.5 million. Assume the shares are left to adult children rather than to a spouse, so the spouse exemption does not apply, and that the nil-rate band is used up by the rest of the estate.

With a properly drafted cross-option agreement, business relief applies. For deaths on or after 6 April 2026, 100% relief is available on the combined value of qualifying agricultural and business property up to an allowance of £2.5 million per person, with 50% relief on value above that. A £1.5 million holding sits inside the allowance, so it attracts 100% relief and the inheritance tax on those shares is nil.

With a binding buy-and-sell clause, business relief is denied on those shares. The £1.5 million is chargeable, and at 40% the bill is £600,000.

Same commercial outcome, same money changing hands, same families — and a £600,000 difference created by two words in a clause nobody would read twice. The allowance is also transferable between spouses and civil partners, so a couple can pass on up to £5 million of qualifying business or agricultural property between them, but that does nothing for you if the relief has been engineered away.

If you have any kind of buy-sell wording in an existing agreement or in your articles, that is the sentence to get looked at this month. And if you do not know what the shares are worth, you cannot size the life cover or the valuation clause — start with how much your business is actually worth.

The half we nearly forgot: illness, not death

Our whole conversation was about death, because that is what the products and the templates are built around. What actually happened to us was not death. It was a man in a hospital bed for eleven days and then unable to work for months.

Nothing in a standard cross-option agreement triggers on that. He remained a 50% shareholder and a director. He could not attend board meetings, could not sign, and — this is the part people miss — could not be removed or replaced in any of his roles because we had a deadlock. Every decision requiring both of us simply stopped. We had a bank facility to renew that needed two signatures and no mechanism at all for the second one.

Three things fix that, and none of them is expensive.

A critical illness option alongside the death option, so that a defined period of incapacity — often twelve months, certified — triggers the same buy-out mechanism. This one is a genuine decision rather than an obvious yes: a partner who recovers may not want to have been bought out, so the option usually sits with the incapacitated shareholder rather than the survivor, and that asymmetry needs to be deliberate.

A lasting power of attorney for property and financial affairs for each shareholder, so somebody can act on their shares if they cannot. Without one, the alternative is an application to the Court of Protection, which takes months.

And a deadlock-breaking provision in the shareholders' agreement: a chair's casting vote for defined categories of decision, an agreed independent third party, or a mechanism to appoint an alternate director. Any of them beats what we had, which was nothing.

What we would tell anyone at fifty-fifty

Do it in the order that gets the protection in place fastest. A shareholders' agreement first, because it covers the ninety-odd per cent of scenarios that are not death — deadlock, someone wanting out, someone underperforming, what a leaver's shares are worth. What to put in a shareholders' agreement covers the ground.

Then the cross-option agreement and the life cover, drafted as reciprocal options and never as mutual obligations. Then the powers of attorney, which cost very little and are the only thing on this list that helps in the scenario we actually experienced.

Then review the valuation mechanism every couple of years, because a formula agreed when the company was worth £800,000 will produce a nonsense number when it is worth £3 million, and the moment it is used is the moment nobody is in a position to renegotiate it.

The whole package cost us a little over £3,000 in fees and about £180 a month in premiums between two of us in our early fifties. We had spent more than that on a website redesign the previous year. The difference is that if the website had gone wrong, we would still have owned the company.

Common questions

What happens to company shares when a shareholder dies?

Unless something says otherwise, the shares form part of the deceased's estate and pass under their will, or under the intestacy rules where there is no will, usually to a spouse or family. There is no automatic obligation on the beneficiary to sell or on the surviving shareholders to buy. Unamended model articles do not contain pre-emption rights on transfer or any compulsory transfer on death, so the default outcome is that you end up in business with whoever inherits. In a fifty-fifty company that produces immediate deadlock, because neither side can pass a resolution the other opposes. A shareholders' agreement and a cross-option agreement are what change this.

What is a cross-option agreement?

It is an agreement between shareholders under which each grants the other an option that becomes exercisable on death. The surviving shareholder has an option to buy the deceased's shares, and the deceased's personal representatives have an option to require the survivor to buy them, at a price set by a valuation mechanism in the agreement and within a defined window, typically six or twelve months. It is normally funded by life assurance written in trust, so the money to buy the shares arrives quickly and outside the deceased's estate. The commercial effect is that the survivor keeps control of the business and the family receives cash rather than an unsellable minority stake.

Does a buy and sell agreement affect business relief from inheritance tax?

Yes, and severely. HMRC treats an agreement that requires the deceased's shares to pass to their personal representatives and requires those representatives to sell to the surviving shareholders, who are obliged to buy, as a binding contract for sale. That prevents the shares qualifying for business relief. Where one side is bound to offer and the other bound to purchase, relief is denied. Reciprocal options do not have this effect: an arrangement where the shares fall into the estate with an option for the survivors to purchase does not constitute a contract for sale and does not prevent business relief applying. The distinction is in the drafting, so any existing agreement using obligation wording should be reviewed.

How much business relief is available from April 2026?

For deaths on or after 6 April 2026, 100% relief applies to the combined value of qualifying agricultural and business property up to an allowance of £2.5 million per person, and value above that allowance qualifies for 50% relief. The allowance is transferable between spouses and civil partners, so a couple can pass on up to £5 million of qualifying property between them, in addition to the nil-rate bands. Where a first spouse died before 6 April 2026, a full £2.5 million allowance is assumed to be available for transfer. Shares designated as not listed on a recognised stock exchange, such as AIM shares, attract 50% relief and are not affected by the allowance.