Share purchase agreements
September 10th, 2008
The first step is to ensure there are relevant legal agreements allowing surviving owners to purchase a deceased’s share of the business. This would be relevant for all participants in the arrangement so you (along with any other remaining owners) would have the option to buy on the death of a co-owner and vice-versa.
It is also possible, as part of the agreement, to protect against shareholders/partners suffering a critical illness by giving the seriously ill individual the option (but not the obligation) to sell their interest to their co-owners. If this option is exercised then the co-owners would have to buy out that individual. This could throw you an important lifeline in the event of diagnosis of a serious illness in terms of knowing you will be able to liquidate the value of your business interest should you not wish to continue working.
It is essential, however, that any agreements do not conflict with any existing legal documents relating to the business such as the Articles of Association (in respect of a limited company) or a Partnership Agreement (in respect of a partnership) as these may also have specific provisions regarding how any share of the business is dealt with in the event of a shareholder or partner leaving the business.
Where necessary you can work with your solicitor to ensure that the correct and necessary formal documentation is in place and ensure any separate share purchase arrangement complements this.
Life assurance policies
Of course, having the agreements in place is all well and good but how would you raise funds to buy a deceased owner’s share of the business? This is where the second part of a share purchase arrangement comes in to ensure that sufficient money is paid on death to the surviving owners to facilitate such a transaction. It is essential that suitable life assurance policies are appropriately sourced for you and your co-owners.
The policies can be set up and tailored to match precisely the business’s own share purchase arrangement and, through the use of specialised trusts, a solution can be established that will be flexible to allow for partners or shareholders leaving and joining the business.
Inheritance Tax (IHT)
For business interests with a significant value a share purchase arrangement is also an ideal opportunity to consider inheritance tax and, where necessary, such an arrangement can be structured in a way that reduces exposure to IHT.
Usually no IHT would be payable on the value of your interest in a partnership or unquoted company on your death. This is due to a tax relief called ‘Business Property Relief’ which effectively ensures owners can pass their share in a business on death to their beneficiaries without them having to pay IHT on it’s value. Typically, however, this only postpones the problem as, usually, the business share passes to the deceased’s spouse who then sells to the surviving owners. On the spouse’s death, therefore, the proceeds he/she received from the sale forms part of the value of his/her own estate for IHT purposes. It is possible, using a specialised trust – often referred to as a ‘spousal by-pass trust’ – to protect the sale proceeds from inheritance tax whilst still ensuring the surviving spouse can benefit from this money during his/her lifetime.
The importance of taking professional advice in respect of a share purchase arrangement cannot be overstated. The arrangements can be extremely complex in certain cases, depending on the type of organisation and its structure, and it is therefore essential that both the share purchase agreements and life assurance arrangements are correctly tailored for your business and structured in a way to avoid any adverse tax implications.
It is important that all the key shareholders or partners participate in such an arrangement where possible. Your Financial Adviser will be able to look at the specific circumstances of your business and recommend a suitable solution.