Control your own business, whatever happens.

What actually happens without it

Two people own a business equally. One dies.

Their half of the company goes to their estate, and usually on to their husband, wife or children. Those people now own half of a business they have never worked in. The surviving owner, meanwhile, is running the whole thing and sharing the profits with someone who cannot help.

Both sides generally want the same outcome. The family would rather have the money than the shares. The survivor would rather have the shares than a business partner who has never worked a day in the trade.

What is missing is usually the cash to make that happen, and a written agreement that says how. Shareholder protection provides both.

The two halves, and why one without the other fails

The policy puts money in the right hands at the right time. Each shareholder is covered for roughly the value of their stake, so that when the worst happens there is cash available to buy those shares.

The agreement is the legal mechanism, usually a cross-option agreement. It gives the surviving shareholders the option to buy, and the estate the option to sell. Because both sides hold an option rather than an obligation, neither can be forced into a deal, but once either side exercises its option the other must follow through.

I see policies with no agreement behind them more often than I would like. The money arrives, everyone is grieving, and there is nothing written down that says what happens next. I also see agreements with no policy, which is a promise to buy shares with money nobody has.

The two are designed to work together, and setting them up is a job shared between me and your solicitor.

How the shares get valued

This is the part people put off, and it matters more than the premium.

Options generally include a multiple of profits, a net asset calculation, or a valuation carried out at the time by an agreed accountant. What matters less is which method you pick, and more that it is written down, both sides understand it, and it is revisited as the business changes.

An agreement that says "at a fair value to be agreed" is where arguments start. Two people who get on perfectly well today can take very different views of "fair" when one of them is negotiating with the other's widow.

Cover set against a 2021 valuation on a business that has doubled since is also a problem. It is not wrong, it is just too small, and the gap comes out of someone's pocket.

Tax, in general terms

This is the question people search for, so here is an honest answer.

How a shareholder protection arrangement is treated for tax depends on how it is structured. Who owns each policy, who pays the premiums, who receives the payout, whether a trust is used and what your company's articles say all bear on it. Business Property Relief and the way the agreement is drafted can matter as well, because an arrangement that obliges a sale outright is not treated the same as one built on options.

Those rules change from time to time, and they apply to your circumstances rather than to shareholder protection in general.

So what I will not do is tell you on a web page what your tax position will be. What I will do is set the arrangement up so the questions are clear, put them in front of your accountant and your solicitor, and make sure the policy, the agreement and the tax advice are decided together rather than in three separate rooms. That conversation is usually short, and it is the difference between an arrangement that works and one that merely exists.

Critical illness, and the question people forget

Most people think about shareholder protection as a death benefit. It is worth thinking about serious illness too.

A shareholder who suffers a critical illness may never return to the business, but they are still an owner, still entitled to a share of profits, and quite possibly still drawing an income. The business carries the cost of replacing them while the ownership stays exactly as it was.

Cover can be arranged to deal with that situation as well, and the agreement can set out what happens. It is a more awkward conversation than the death one, because everybody is still in the room. It is also the scenario more likely to happen, which is a cheerful thought for a Tuesday.

Where this sits with your other cover

Shareholder protection deals with ownership. It does not replace the money a business loses when someone central to it is gone, which is what key person insurance is for, and it does not provide for the family beyond the value of the shares, which is often where a relevant life plan comes in.

The business protection page sets out how all four covers fit together. If you are a company director with a mortgage on your mind as well, business owners and directors covers how lenders assess director income.