Cross Option Agreement (COA) is an essential component of Business Property Relief (BPR) planning. It helps to ensure that business owners can safely navigate the tax implications of passing on their businesses in the event of death. In this article, we will discuss COA in detail and explain its significance in BPR planning.
What is a Cross Option Agreement?
A Cross Option Agreement is a legally binding document between two parties. It is commonly used among business owners to plan for the future of their businesses in the event of death. This agreement allows the surviving business partner(s) to purchase the deceased partner’s shares in the company at a mutually agreed price.
COAs are commonly used by business owners who want to reduce inheritance tax liability. The reason is that when a business owner dies, the value of their shares in the business is included in their estate for inheritance tax purposes. With a COA in place, the deceased partner`s shares do not form part of their estate. Instead, the surviving partner(s) can purchase the shares quickly and efficiently, without the need for probate.
The Benefits of a Cross Option Agreement
For business owners who have put their hearts and souls into their companies, it can be challenging to consider what might happen to the business after they pass away. However, a COA is an essential part of BPR planning, as it offers several benefits:
1. Protection for Business Owners
A COA provides business owners with protection against the possibility of their shareholdings being sold to a third party. In the event of death, the surviving partner(s) can purchase the deceased partner`s shares, ensuring control of the company remains with the people who know it best.
2. Reduced Inheritance Tax Liability
As previously mentioned, a COA can help reduce inheritance tax liability. Since the shares do not form part of the deceased`s estate, there is no need to pay inheritance tax on them.
3. Increased Efficiency
A COA makes the process of transferring shares after the death of a partner much more efficient. Without this agreement in place, the process of transferring shares can be time-consuming, and it may take several months or even years to complete. With a COA, the surviving partner(s) can purchase the shares quickly and efficiently.
In summary, a COA is a crucial component of BPR planning, offering business owners protection against the possibility of their shareholdings being sold to a third party in the event of their death. Additionally, it can help reduce inheritance tax liability and increase efficiency, making the process of transferring shares after death much easier. For business owners looking to secure the future of their companies, a COA is an essential document that should not be overlooked.