Cross Option Agreements

How do Frog Wealth Management’s Company Wills and Cross Option Agreements Differ?

Cross Option Agreements

Frog Wealth Management offers business Estate planning, tailor-made to suit you and your business. It takes the standard planning options available on the High Street, a significant step further.

Frog Wealth Management’s planning provides this significant protection to your business and reduces the possible impact of IHT dramatically. Furthermore, the business and proceeds from a future sale are protected for the Bloodline from IHT, remarriage, divorce, separation, creditor claims and Nursing Care Fees.

Our planning leaves each partner or Director’s share of their business, to their own Family Trusts through appropriate Clauses written into their own Wills.

Furthermore, the proceeds from the appropriate Life Cover will also be protected, ensuring that these do not impact on the surviving individual’s Estate, which happens all too often.

Once the Cross Option has been executed, our planning ensures the proceeds from any Life Assurance policy also do not form part of the Beneficiary’s Estate.

These funds are now protected against any of the risks named above, yet the surviving spouse and Beneficiaries still have full access to the Trust assets.

The corrently prepared Cross Option Agreement is essential. Check out the other signficent advantages here

What about the impact a standard cross option agreement has on someone’s Estate?

If you or a business partner dies their share will pass to their spouse or Beneficiaries through their Will. This is now deemed to be part of their Estate. Whilst this share is held and the business continues trading, then the assets could be exempt from IHT, assuming they qualify for Business Property Relief (BPR). Once the Cross Option has been affected then BPR is no longer available on the proceeds, i.e. from any life assurance pay-out. The spouse’s assets have now increased by the funds received from the life assurance policy, risking 40% of their proceeds to IHT, which depending on the size of the business could be a significant loss.

These assets are also at risk from attack from any future remarriage claims, creditors or bankruptcy and Long Term Care costs.

What are the consequences a standard Cross Option agreement for the surviving business partner?

With a standard Cross Option Agreement, the surviving partner now owns 100% of the company. This is fine whilst the business is still trading and whilst BPR is still applicable.

What would happen if they decide to sell the business?

Their personal Estate will increase to include the proceeds from this sale. Furthermore, the spouse is wide open to attack from IHT, creditors, bankruptcy, divorce and Long Term Care costs.

(i) Each Director leaves their share of the Business to their Beneficiaries via their Will.
(ii) Cross Option Agreement established to enable one Director to purchase the other Director’s share of the business in the event of their death.
(iii) Life Assurance policies taken out by the company in order to fund the purchase of the shares / partnership.

(iv) On the death of Director, A, his share of the business passes through the Will to his Beneficiaries. The Life Assurance policy pays out. The company can then execute the Cross-Option Agreement, using the Life Assurance proceeds to purchase Director A’s share of the business.
(v) This results in Director A’s Beneficiaries receiving the life assurance proceeds, and Director B owning 100% of the company.

Consequences to
Director A’s Beneficiaries
Consequences to
Director B
Beneficiaries now have the funds from the Life Assurance policy.

These funds are now part of their Estates and so will be assessable for IHT when they die.

These funds are also at risk from claims from divorce, remarriage, bankruptcy and long term care.

3rd Party Claims
Director B will now own 100% of ABC Ltd which is at risk from divorce, remarriage, bankruptcy and long term care.IHT
Whilst trading, Business Property Relief is applicable. However, if he sells the business, the cash proceeds will then be part of his Estate and so will be assessable for IHT when he dies.CGT
On sale, the growth in Director B’s share has increased and hence more CGT payable than necessary.

Example of potential Tax Liability:

If we assume that the business is eligible for Entrepreneurs Relief, then the CGT (CGT) rate is 10%.

CGT payable on sale = £180,000

Example of potential Inheritance Tax (IHT) liability:

Director A and Director B each own 50% of ABC Ltd which is valued at £1,800,000.
Director A dies leaving 50% of the business to his Beneficiaries. The Cross-Option Agreement is executed resulting in £900,000 entering the Beneficiaries’ Estate.

When the Beneficiaries die, the potential IHT bill on these funds is 900,000 x 40% = £360,000
Subsequently, Director B decides to sell the business resulting in £1,800,000 entering his Estate.
When Director B dies, he leaves a potential IHT bill of £1,800,000 x 40% = £720,000

A combined tax bill for the surviving director of £720,000 + £180,000 = £900,000

The potential combined IHT bill = £360,000 + £720,000 = £1,080,000

Please note, the Financial Services Authority do not do not regulate some forms of Trust products and services.

Making a Company Will in your lifetime could not be easier, if set out correctly. All the objectives and aspirations of the shareholder or partners are taken into consideration. With our bespoke service and trained team, we will ensure every aspect is covered to ensure your business Will follows your wishes of your personal Will.

Most adviser’s advice ends at this point and promise to review the protection and needs of the shareholders annually. But what about “beyond-death-planning” of a shareholder, that’s where Frog Wealth Management really specialise and are proud to be head and shoulders above the rest.

As an existing business owner, you’ll have a clear vision of what you want to achieve from it and more importantly what you want when you retire or sell your shares. To maximise the value, you receive for your business it’s essential to think about how you’ll leave it further down the line.

Carefully planning your exit from the business can help you to:

  • Mould your business into the ideal shape for your chosen exit option – maximising the value you get from it.
  • Groom successors if they’re coming from within the business – whether they’re a family member or part of your management team.
  • Exit at a time of your choosing, when the business is doing well and the market conditions are advantageous.

Ideally, you should include an exit strategy in your start-up business plan. It can then be reviewed and revised whenever you work on your annual business plan and budget – and you can steer your business in the direction that your exit option demands.

If you manage an existing business and don’t have an exit plan, you should now think about what your preferred exit option might be – and consider whether you could change the way you run your business to help you achieve it.

The way in which you exit can affect:

  • The value you and other shareholders realise from the business.
  • Whether you receive a cash deal, deferred or staged payments.
  • The future success of the business and its products or services.
  • Whether you retain any involvement in or control of your business.
  • Your tax liabilities.

Presently, shares within your Company can present an issue if the company was to be sold in the future.

Capital Gains Tax (CGT) would usually be charged to the shareholder upon sale. The current full rate is 28%. Entrepreneur’s relief may be available up to the first £5 million for each shareholder. This is dependent on any previous disposals since 6th April 2008 and the trading status of the company. The latter can be affected by the nature of assets held by the company.

Whilst the shares may qualify under current Business Property Relief and so be free from Inheritance Tax (IHT), when sold these shares are replaced by cash, which will be included in an individual’s Estate for IHT purposes and thus taxed at 40%.

Taking appropriate advice from our advisers can maximise the tax efficiency of how you exit from your business and take the proceeds on the sale of your shares, using a Share Release Trust, Shares enter a separate Trust, The Share Release Trust.

This allows:

  • The shares to be sold free of CGT (Shareholder retains his full Entrepreneurs Relief to be used later maybe).
  • Reinvestment can be made CGT free.
  • Income returns are Income Tax free.
  • Share sale proceeds fall outside of the Estate and so, no future IHT liability.
  • The benefit of the tax-free environment means the assets pass down the generations, as the structure is retained for at least 125 years.

Once again, the use of Trusts ensures that the surviving business partner, still retains their original share of the business and still has complete control on the whole business as he/she is named as a Trustee of the Trust(s) which now own the deceased Director’s shares.

This same Trust(s) are also utilised further, as a very efficient income tax planning tool. Now that a proportion of the business is held in Trust any dividends paid into the Trust(s) can be distributed to Beneficiaries of the Trusts, who may well have a nil or low rate income tax liability, such as children, spouse/partner, etc.

Should the surviving Director(s) decide to sell the business only their original share of the business will enter their Estate. The remaining share belongs to the Trust, for which the surviving Director and his/her family are Beneficiaries.

This share is also protected and cannot be assessed for IHT purposes and provides protection from attack by Long Term Care Costs, divorce, and bankruptcy.

If you would like to know how our Cross Option Agreements will benfit your business