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What are the tax issues with a non-reciprocal share option and life assurance arrangement on a sole shareholder's death?

I'm considering the following situation:

One person (A) is sole owner and director of a limited company. They are considering succession planning in which two senior employees (B & C) would purchase A's shareholding from A's estate on A's death. This is similar to more standard director share protection arrangements, but without the usual reciprocity (as B & C do not have a shareholding to offer). The proposal would be for A to take out a life policy, written in trust for the benefit of B & C. The company would then pay the premiums. There would also be an option agreement (not fixed to retain BPR) entitling either the estate of A, or B & C to force a purchase of A's shares by B & C.

My key concern with this arrangement is that there is no reciprocity, so HMRC could argue that this is not a wholly commercial arrangement, and that the gift with reservation rules (s102 FA) could therefore apply (with IHT then due on the estate).

Are you able to give a view on whether these concerns appear valid, and if you know of any other potential way of achieveing a similar outcome more simply?

Anonymous (Private practice)

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