The non-affected shareholding directors’ need is to maintain control of the company following the death or critical illness of one of the other shareholders. On the other hand, the critically ill shareholder or the family of a deceased shareholder will usually be looking for adequate financial compensation if they are no longer going to have an interest in the business.

The solution, at a high level, is:

  • For the shareholders to come to an agreement at an early stage as to how the shares will be dealt with on death (and/or critical illness), so that there is a ready and willing buyer of the shares – and then go on to document that agreement.
  • Forward planning, so that the necessary funds are available when a shareholder dies in the right hands and in a tax efficient manner.

This arrangement can be done either individually or by corporate action. The individual route sees the directors generate the financial means to buy the shares (as individuals) by making payments to a life assurance and/or critical illness plan, using plan proceeds when their colleague dies or suffers a critical illness.

The main reason for considering the corporate route, of funding the necessary plans and then making the desired purchase, will usually be to minimise cost. Given that payments paid will not be deductible, whoever pays them, and that the source of the funds for payment will be the company, it will usually be cheaper for the cost to be met by the company out of ‘after-Corporation Tax’ money rather than out of after-income/national insurance (NIC) money.

The latter would be the case under the individual route unless the payments were made from amounts owed to the shareholders by the company–loan accounts.

To discuss this in more detail please call the office on 0800 6342 111 or send an email to This email address is being protected from spambots. You need JavaScript enabled to view it.