What is Cross-Option Agreement?

Full Definition

A cross-option agreement is a legal arrangement, typically put in place between the co-owners (shareholders or partners) of a private business, that gives the surviving owners an option to buy a deceased co-owner's share of the business from their estate, and separately gives the deceased's estate (usually acting through their executors) an option to require the surviving owners to buy that share. Because these are options rather than binding obligations on both sides, either party can choose whether to exercise their option when the time comes, which is normally combined with shareholder protection insurance (or partnership/key person protection insurance) written on each owner's life, so that if an option is exercised, the surviving owners have a guaranteed source of funds -- the insurance payout -- to buy out the deceased's share without needing to find the money elsewhere or sell business assets under pressure. This structure is generally preferred over a simple binding buy-and-sell agreement (where each side is contractually obliged to buy or sell) specifically for Inheritance Tax reasons: HMRC has historically taken the view that a binding obligation to sell can prevent Business Relief from applying to the shares in the deceased's estate, because the estate never really has a choice about disposing of them, whereas a cross-option structure, where each side merely holds an option, is generally considered compatible with the shares still qualifying for relief. The overall effect is to give business co-owners certainty that the business will stay in the hands of the remaining owners rather than passing to a deceased partner's family (who may have no interest in, or ability to help run, the business), while still ensuring the deceased's family receives fair value for their share.

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