Shareholder & Partnership Protection

If your business partner or a shareholder died or became critically ill, have you ever thought what the impact could be?

The loss of a business partner or a shareholder can have a major impact on the success of any business. But it’s not just about the loss of profits the business could suffer. Who would take their place? Not only in performing their day- to-day duties, but also in making decisions of how your business is run in the future.

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No knowledge of the business

You could even be forced to work with a member of their family who has no knowledge of the business and isn’t really that interested in it. That family member would now have the same say as your partner before they died. This could be very disruptive or totally unacceptable to the other partner/ shareholders. The family may even want to sell their share of the business, which could be bought by a competitor or other unsuitable buyer.


Also, if your shareholding director or partner becomes critically ill, this could lead to uncertainty for the business. Would they be able to return to work? Would they even want to? Would they want to sell their shares following a health scare?

When the unexpected happens

Unlike the other forms of business protection, shareholder or partnership protection covers individuals rather than the company. It can help solve many of the problems that could arise when the unexpected happens.


The protection needs of shareholders and partners are broadly similar. This protection gives you and your partners the security of being able to keep the ownership of the business in the hands of the people who have built it by enabling you to ‘buy out’ the share of a business colleague who has died or become too ill to carry on working at a fair price.

No knowledge of the business

You could be compelled to work with an uninformed family member of your deceased partner, giving them equal say in the business. This situation could disrupt or upset other shareholders. The family might also consider selling their shares to a competitor or unsuitable buyer.


Additionally, if your partner or director falls critically ill, it creates uncertainty for the business. Will they return to work or want to sell their shares after a health scare?

When the unexpected happens

Unlike other business protections, shareholder or partnership protection focuses on individuals rather than the company, addressing issues that may arise unexpectedly.


Shareholders and partners have similar protection needs, allowing you and your partners to maintain ownership by enabling a ‘buy out’ of a colleague’s share if they die or are too ill to continue working, at a fair price.

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Ensure control of the company

It can also form part of an arrangement that is designed to ensure that control of the company stays in the hands of the current owners, and that the family that inherits the shares receives their full value. If a company’s Articles of Association includes a pre-emption clause, the remaining shareholders have an automatic right to buy the shares of a partner who dies or leaves due to illness.


If a partnership has not drawn up a partnership agreement, under current law the partnership will end on the death of any of the partners. With suitable cover and a suitable arrangement in place, the remaining owners would not have the issue of raising capital to buy out a business owner who is critically ill, or the heirs of a business owner who has died, and allows them to keep control of the business.

Establish the sums assured needed

If you are self-employed, then no work is also likely to mean no income. However, depending on what you do, you may have income coming in from earlier work, even if you are ill for several months. The self-employed can take out individual policies rather than business ones, but you need to ascertain on what basis the insurer will pay out.


A typical basis for payment is your pre-tax share of the gross profit, after deduction of trading expenses, in the 12 months immediately prior to the date of your incapacity. Some policies operate an average over the last three years, as they understand that self-employed people often have a fluctuating income.


Ensure control of the company

It can help ensure that the company's control remains with current owners and that heirs receive full value for shares. If the Articles of Association include a pre-emption clause, remaining shareholders can automatically buy the shares of a deceased or incapacitated partner.


Without a partnership agreement, the partnership ends upon a partner's death. With proper arrangements, remaining owners can avoid the challenge of raising capital to buy out a critically ill partner or their heirs, thus maintaining control of the business.

Establish the sums assured needed

If you are self-employed, no work usually means no income. However, you might still earn from previous work, even if ill for months. The self-employed can secure individual policies rather than business ones, but it's important to clarify how the insurer pays out.


Typically, payment is based on your pre-tax share of gross profit, minus trading expenses, in the 12 months before your incapacity. Some policies use a three-year average to account for fluctuating self-employed incomes.

Importance of obtaining professional advice

Each person should be covered for their share's full value, which should be regularly reviewed to ensure adequate coverage as a company's value changes.


The policy should allow for annual inflation-proofing and significant single increases without requiring further health evidence.


The business protection's structure can affect the taxation of any benefits or premiums. A business agreement should outline how funds will be used after a claim, such as a cross or single option agreement. Given that circumstances vary, it's essential to seek professional advice to establish the best arrangements.

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Frequently Asked Question's

Your questions about Insurance answered.

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  • What is shareholder protection for directors?

    Shareholder protection is an arrangement that provides the remaining business owners with the necessary funds to buy the shares of a deceased or critically ill director from their estate or family. It typically involves a legal agreement, such as a cross-option agreement, and life or life and critical illness insurance policies. 

  • Why is it important for directors?

    Without it, several problems can arise: 

    • Loss of control: The shares might be inherited by a family member with no business experience or interest in being involved, or sold to an unwelcome third party, possibly even a competitor.


    • Financial strain: The remaining directors may not have enough personal funds to buy the shares at a fair value, potentially forcing them to use business capital, seek loans, or even wind up the company.


    • Uncertainty for the family: The deceased's family may struggle to find a buyer for the shares and receive a fair price, especially for unlisted private company shares which lack marketability.


    • Business disruption: The process of dealing with an unplanned change in ownership can cause significant disruption to the company's operations and stability. 


  • How does the process generally work?

    The most common method involves these steps: 


    1. Valuation: The directors agree on a method to value each shareholder's interest in the business (usually with the help of an accountant).


    2. Insurance: Each director takes out a life insurance policy (often with optional critical illness cover) on their own life, for the value of their shares.


    3. Trust: The policies are typically written into a business trust, specifying that the surviving shareholders are the beneficiaries of the payout.


    4. Legal Agreement: A formal legal document, usually a cross-option agreement (or double option agreement), is put in place. This agreement gives the remaining shareholders the option to buy the shares and the deceased's family/estate the option to sell, but neither is obligated until an option is exercised after death, which helps preserve Business Property Relief (BPR) for Inheritance Tax (IHT) purposes. 


  • Is a legal agreement necessary in addition to the insurance?

    Yes, the insurance policy provides the funds, but the legal agreement (cross-option agreement) provides the framework and rules for the share transfer, ensuring the process is followed as intended and legally binding on all parties.

  • Does the insurance payout have tax implications?

    The lump sum payout from the insurance policy is generally free from income tax and Capital Gains Tax (CGT). If the arrangement is set up correctly as a commercial transaction using a cross-option agreement, it should also avoid IHT issues by preserving Business Property Relief (BPR) on the shares. 

  • What happens if a director becomes critically ill?

    If critical illness cover is included, a single-option agreement is usually used. This gives the critically ill shareholder the option to sell their shares to the remaining directors, but it does not force them to sell, allowing for the possibility of recovery and return to work.