Cross-Option Agreement and IHT: Business Protection, BPR, and Shareholder Succession
A cross-option agreement (double option) allows surviving business partners or shareholders to buy the deceased's interest using life insurance proceeds, without creating the binding contract for sale that would deny Business Property Relief. The life policy must be written in trust — keeping the proceeds outside both estates and avoiding probate delay.
How a Cross-Option Agreement Works: 4 Steps
Life policy written in trust
Each shareholder takes out a life policy on their own life (or a joint life, second death policy for couples), written in trust for the other shareholders. The policy proceeds are paid to the surviving shareholders directly from the trust — outside both estates and without probate delay.
Cross-option agreement signed
The shareholders enter a cross-option agreement. This gives each party two options: (1) PUT option: the deceased's estate has the right to sell (put) the deceased's shares to the surviving shareholders; (2) CALL option: the surviving shareholders have the right to buy (call) the deceased's shares from the estate. Both options can be exercised after death — but neither can be exercised before death.
Death occurs
On the death of a shareholder, the life policy pays out to the surviving shareholders via the trust. The surviving shareholders now have the cash to exercise their call option and buy the shares. Or the estate exercises the put option and sells the shares.
Option exercised
Whichever party exercises their option, the shares are sold at a pre-agreed valuation (often using a formula in the agreement, or a market valuation). The surviving shareholders own 100% of the business. The estate receives the sale proceeds — which are cash, not qualifying business assets, and are subject to IHT unless used quickly.
Cross-Option vs Binding Buy-Sell: The IHT Difference
| Structure | BPR available? | Reason |
|---|---|---|
| Cross-option agreement (put + call, each exercisable after death) | YES — BPR preserved | No binding contract for sale. Both parties have options, not obligations. IHTA 1984 s113A does not apply. |
| Binding buy-sell agreement (automatic sale on death) | NO — BPR denied | Transfer made in pursuance of a binding contract for sale at the date of transfer — IHTA 1984 s113A removes BPR. |
| Single (call only) option — survivors can buy but estate cannot sell | Generally YES | No binding obligation on the estate. HMRC accepts this structure. However, the estate may prefer the right to sell — hence double option is standard. |
Frequently Asked Questions
What is a cross-option agreement and how does it work for business succession?
A cross-option agreement (also called a double option agreement) is a legal contract between business partners or shareholders that addresses what happens to a business interest if one owner dies. It creates two options: (1) a PUT option giving the deceased's estate the right to sell (put) the deceased's shares to the surviving shareholders; and (2) a CALL option giving the surviving shareholders the right to buy (call) the shares from the estate. Crucially, both options are exercisable only after death — neither creates a binding obligation to buy or sell during the deceased's lifetime. On death, one of the parties exercises their option, and the business interest transfers to the surviving shareholders at a pre-agreed or independently valued price. A life policy written in trust for the surviving shareholders provides the cash to fund the purchase. The result: the surviving shareholders keep control of the business; the deceased's estate receives the agreed consideration (cash); no forced sale of the business.
Does a cross-option agreement affect Business Property Relief on the deceased's shares?
This is the critical IHT question. Under IHTA 1984 s113A, BPR does not apply to a transfer that is part of, or made in pursuance of, a binding contract for the sale of the business at the date of the transfer. If the cross-option agreement created a binding obligation for the estate to sell on death, BPR would be denied — the shares would be valued at their market value and taxed at 40%. HMRC's position (confirmed in HMRC's Business Assets Manual) is that a properly structured cross-option agreement does NOT create a binding contract for sale. The key: each option is exercisable at the choice of the holder. The estate can choose whether to exercise the put option; the survivors can choose whether to exercise the call. Neither is obliged to buy or sell — they merely have the right (option) to do so. HMRC distinguishes this from a binding buy-sell agreement (where the estate is automatically required to sell and the survivors are required to buy). A binding automatic buy-sell agreement DOES deny BPR. Only a true cross-option (where options may or may not be exercised) preserves BPR.
Why does the life policy need to be written in trust for a cross-option to work?
The life policy proceeds are paid on the death of the insured. Without a trust, the policy proceeds form part of the insured's estate — they would be subject to IHT before the surviving shareholders can access them. This defeats the purpose of the policy as a funding mechanism. Writing the policy in trust: (1) keeps the policy proceeds outside the insured's estate (the trust owns the policy, not the insured); (2) allows proceeds to be paid directly to the surviving shareholders as trustees/beneficiaries without probate delay (the trust pays out immediately on production of the death certificate and proof of identity); (3) avoids IHT on the policy proceeds. For a cross-option, each shareholder typically writes a policy on their own life in trust for the other shareholders. The trust is usually a 'life of another' trust or a relevant life trust. The trustees of each policy trust hold the proceeds for the surviving shareholders — who then use the cash to fund the purchase of the deceased's shares.
What happens to the shares after the option is exercised — is there CGT?
When the surviving shareholders exercise the call option (or the estate exercises the put option), the deceased's shares transfer at the agreed price. Capital Gains Tax consequences: (1) FOR THE ESTATE: the personal representative disposes of the shares on the exercise of the option. The disposal is treated as occurring at the date of death (for the uplift to market value under TCGA 1992 s62), not at the date of the option exercise. In practice, the shares receive a CGT base cost uplift to market value at death — so if they are sold at approximately that value, there is little or no CGT. (2) FOR THE SURVIVING SHAREHOLDERS: they acquire the shares at the option price. Their CGT base cost is the option price paid. When they later sell the business, CGT will arise on any further gain. Business Asset Disposal Relief (10% CGT rate) may be available when the business is eventually sold, subject to qualifying conditions.
How should the cross-option agreement be valued and at what price?
The cross-option agreement typically provides a mechanism for determining the option price at the time it is exercised. Common approaches: (1) FORMULA: the agreement specifies a formula (e.g. a multiple of average annual profits, or net asset value per share). Simple to apply but may not reflect true value at the time of exercise. (2) INDEPENDENT VALUATION: the agreement requires an independent accountant or business valuer to determine the price at the date of death. More accurate but takes time and may cause delay. (3) FIXED PRICE: agreed in advance (e.g. £X per share). Quick to apply but can become outdated if not reviewed regularly. The chosen price must reflect the actual BPR-qualifying value (after deducting excepted assets) to ensure the life policy sum assured is adequate. If the policy sum is less than the agreed option price, the surviving shareholders may not have sufficient funds to exercise the call option. The cross-option agreement should be reviewed whenever: (a) the business value changes significantly; (b) a new partner/shareholder joins; (c) a shareholder leaves.
Does a cross-option agreement apply to partnerships as well as companies?
Yes — cross-option agreements are used for both company shareholders (where the interest is shares) and business partners in an LLP or partnership (where the interest is a partnership share or LLP membership interest). For partnerships, the agreement works identically: the partnership interest has a put option (estate can sell) and a call option (surviving partners can buy). BPR considerations are the same — the partnership interest qualifies for 100% BPR (IHTA 1984 s105(1)(a)) provided there is no binding obligation to sell at death. From April 2026, the £2.5m cap applies: BPR at 100% only on the first £2.5m of qualifying business assets per person. For large partnerships with substantial capital accounts (e.g. senior partners in professional firms with £3m+ capital accounts), the cross-option may now cover a larger effective IHT bill on the excess above £2.5m. Life insurance policies need to be sized accordingly.
Your Business Will
A cross-option agreement needs to be co-ordinated with your will. Your will should address what happens to your business interest in scenarios not covered by the agreement and appoint an executor who understands your business succession plan.
View Business Owner Will Kit