This article was last updated 0 months ago and may not represent current law.
When a shareholder in a business dies, his or her shares will automatically pass to their estate - either under a Will or, if there is no will, under the rules of intestacy. Many Companies will have been set up using standard ‘Model Articles of Association’ or ‘Table A’ articles of association, which simply say that the executor of the deceased’s estate can seek to become the registered shareholder or transfer them to another person.
In my experience, this isn’t what most people want.
Firstly, the family of the deceased is usually grieving and so it is tough for the Company (the remaining shareholders) to put too much pressure on to ‘sort out the shares’ as it would look mean-spirited.
Secondly, sometimes partners of deceased shareholders don’t wish to sell the shares. They think that they can (and indeed sometimes actually can) do the job better. Alternatively, they may just say they would rather keep the shares, not playing an active role, and just take the dividends from the Company. They therefore refuse to sell or hand back the shares. This isn’t great, usually, for the Company particularly in small owner-managed businesses, as all of a sudden a percentage of profit is being paid to someone who isn’t working and given many small companies do not pay full salaries and instead pay via dividends, that often feels unfair to the remaining shareholders.
Thirdly, what would a fair price be to pay for the shares if the executor did want to sell? And how can the Company/other shareholders find the money to pay for the shares anyway?
(If you are the only shareholder and the only director, the problem is a different one, as there may be nobody left with authority to run the company at all. I've covered that in what happens when a sole shareholder and director dies.)
A shareholders agreement could be a better option
What I find most small owner-managed businesses prefer to do is have a shareholders agreement which says that on the death of a shareholder, the remaining shareholders can buy their shares for a set price or a price to be determined, and the estate can require them to.
This means that:
- The spouse or estate of the deceased gets a lump sum of money, rather than have to deal with the shares etc. The process can happen without too much involvement from the executors.
- The remaining shareholders can get on with running the business and taking money out of it.
- Where there is shareholder protection insurance or relevant life plans in place, the remaining shareholders will have sufficient funds to pay for the shares, which means no cash flow impact on the company and no significant tax liability in drawing out profit to pay for the shares.
The agreement needs to say how the shares are valued and when the price is paid, as those are the two things people fall out over. I've written a longer piece on what happens when a shareholder of a company dies which goes through the provisions in more detail.
What is a Cross Option Agreement?
A cross option agreement is a contract between the shareholders of a company in which each shareholder grants to the other shareholders the right to purchase their shares on death, and the estate of the shareholder who has died gets a matching right to make the others buy. They are linked with insurance products held in trust for each of the other shareholders.
It is another way of making sure that, on death, the shareholders have the right to buy the shares of the deceased and that they have the cash to do so.
Personally, I do not think a separate cross-option agreement is absolutely necessary if you have one of my excellent shareholder agreements in place, as the options can go in there. But for smaller companies who only want to deal with shares on death, a cross option agreement is necessary.
Sometimes financial advisors providing certain types of insurance will want to put in place cross-option agreements, but a shareholders agreement is really what you want. I've compared the two in do I need a cross-option agreement or a shareholders agreement?
Why options, and what about inheritance tax?
I don't give tax advice, so take this as a pointer and speak to your accountant. Shares in a trading company can qualify for business property relief from inheritance tax. That relief can be lost if, when you die, the shares are already subject to a binding contract for sale. HMRC's view in its inheritance tax manual is that an agreement which obliges your executors to sell and the other shareholders to buy is a binding contract of that kind, whereas an arrangement where each side only has an option is not. That is the reason these agreements are written as options, and it's something I'd want checked on any older agreement which simply says the shares "must" be sold on death.
The relief itself has also changed since I first wrote this. Trading company shares used to get 100% relief whatever they were worth. For deaths and other transfers on or after 6 April 2026, 100% relief is limited to an allowance of £2.5 million per person (shared with agricultural property), with 50% relief on anything above that. Any allowance you don't use can pass to your spouse or civil partner. So if your shares are worth more than that, inheritance tax on them is now something to plan for, and I've written about it in inheritance tax and private company shares.
What is shareholder protection / relevant life insurance?
NOTE: I am not regulated to give advice on financial products. If you require any advice, I can refer to some excellent independent financial advisors who are regulated by the FCA to provide you with advice.
There are a few different types of insurance which can be taken out:
Key person protection - in case a key individual dies or becomes critically ill
Shareholder protection - in case a partner or shareholder dies or becomes critically ill
Relevant life insurance - tax-efficient life insurance for employees and directors
Business loan protection - to cover any business debts
The one I see the most is relevant life insurance, which I understand is a policy in the individual shareholder/directors names, but for which premiums can be paid by the Company to make it tax-efficient. As I understand it, on death the insured sum gets paid to the other shareholders who can then use it to buy the deceased's shares, but who receives the money depends on how the policy and its trust are set up. There’s legislation around relevant life plans and tax avoidance and so it’s really important you get proper advice from an IFA.
When I link the right insurance cover with a shareholders agreement, there is a really nice and simple way of making sure the shares can be bought back, and the deceased’s estate gets a lump sum of cash.
Shareholder protection is another option, and my understanding is that the funds get paid into the Company and it is the Company who buys back the shares.
If you’re one for learning and reading about the different options, Royal London has a really comprehensive guide here - but it is really for qualified advisors and so again, my advice is to take advice! There are a number of great financial advisors who I can happily recommend.
Don't forget your will
Your will and the company documents need to say the same thing. If the will leaves the shares to your children and the shareholders agreement gives your business partners an option to buy them, your children will end up with the money and not the shares, which is fine as long as that's what you meant. I don't write wills or lasting powers of attorney. My private client colleagues at Nexa, Samantha Downs, Donna Taylor and James Winfield, do those, and it works best when the will and the company documents are looked at together. There's more on how I work with them on my estate planning for business owners page.
If you need a shareholders agreement or a cross option agreement, or you have one and aren't sure it still does the job, then get in touch. I can also point you towards a financial advisor for the insurance side.
Written by Steven Mather, a business solicitor acting on company sales and purchases. This is general information about the law, not legal advice on your situation. Law correct as at .
