What are the tax implications of a binding buy/sell arrangement?
For protection policies only. This information is for financial advisers only. It mustn’t be distributed to, or relied on by, customers.Thu Nov 16 15:39:00 GMT 2017
When setting up a business succession arrangement, shareholders can enter into either a binding buy/sell agreement or a cross option agreement.
With a binding buy/sell agreement, if a shareholder dies, the deceased’s personal representatives have to sell and the other shareholders have to buy the deceased’s shares. At the date of death, the deceased is deemed to have the cash proceeds in their estate rather than the shares, and cash is fully subject to inheritance tax (IHT). Business property relief isn’t available.
The loss of business property relief with a binding buy/sell agreement might not be an issue if the deceased’s estate is to pass under their will or the rules of intestacy to a surviving husband, wife or civil partner, because that would be an exempt transfer. In this case, there wouldn’t be any IHT to pay on a shareholder’s death. However, this doesn’t help unmarried shareholders or shareholders whose civil partnership isn’t registered.
In contrast, under a cross option agreement, the shares form part of the deceased’s estate but business property relief will generally be available, because the sale of the shares only becomes binding if either party exercises their option.
This information is based on our understanding of current legislation, taxation law and HMRC practice, which may change.