Cross-Option AgreementsHow They Work with Shareholder Protection

A cross-option agreement is a legal arrangement between shareholders that gives both parties options — not obligations — to buy or sell shares following a shareholder's death or critical illness. Under HMRC BIM45530, the insurance funding these agreements serves a capital purpose. The agreement works through two interlocking options:

• Put option: The deceased shareholder's estate has the right (but not the obligation) to require the surviving shareholders to buy the shares at an agreed or formula-based price.
• Call option: The surviving shareholders have the right (but not the obligation) to require the estate to sell the shares at the same price.

This dual-option structure is deliberately designed to avoid creating a binding contract for sale, which would destroy Business Property Relief for inheritance tax. The ABI reports \u00a38 billion in UK protection claims paid in 2024, including business protection policies that fund these agreements.

The critical reason cross-option agreements use options rather than a binding contract is Business Property Relief (BPR). BPR provides up to 100% relief from inheritance tax on qualifying business shares. However:

• A binding contract for sale at the date of death removes the shares from BPR eligibility, because HMRC treats them as already sold
• Cross-options (put and call) are not binding contracts for sale — they are merely options that may or may not be exercised
• This preserves BPR, meaning the shares can pass to the estate with 100% IHT relief

The Legal & General Technical Guide provides detailed analysis of BPR interaction with cross-option agreements. For the tax treatment of the insurance premiums themselves, see shareholder protection insurance tax. The FCA recommends taking professional legal and financial advice when structuring these agreements.