What are the tax implications of a binding buy/sell arrangement?
This information is for financial advisers only. It mustn’t be distributed to, or relied on by, customers.21 October 2016
HM Revenue & Customs considers there to be a binding contract for sale where the shareholders enter into a buy and sell agreement. This means that, if a shareholder dies, the deceased’s personal representatives are obliged to sell and the other shareholders are obliged to buy the deceased’s shares. At the date of death, the deceased is deemed to have the cash proceeds rather than the shares, and cash is fully subject to inheritance tax. Business property relief isn’t available.
Under the cross option agreement, the deceased’s estate receives cash if either party exercises their option. Business property relief will normally be available, because the sale of the shares only becomes binding if either party exercises their option.
The loss of business property relief 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.
This information is based on our understanding of taxation law and HMRC practice, at date of publication.