The Minority Shareholder Trap16th June 2015 1:23 pm Leave your thoughts
You and your three friends start up a business. It takes off and, on the advice of your accountant, the four of you form a limited company. Each of you has 25% of the shares. You are a minority shareholder, but that doesn’t bother you. Why should it?
The business has grown and is now worth £1m. In your mind, your shares are therefore worth £¼m.
You probably haven’t thought about it but, if asked, you expect that if you step under a bus, your wife will get your 25% shareholding. She will need money, not shares, but you expect she will be able to sell the shares for £¼m.
It doesn’t work like that.
Even if you have made a Will and your wife inherits your shares, the chances are she will not be able to sell them at all. If she can sell them, she will probably get no more than a fraction of their notional value.
The only way to guarantee that your widow can sell your minority shareholding and get full value for it, is for you and the other shareholders to enter into an insurance-backed cross-option agreement.
If the job is done properly, your widow will get her £¼m after your death with no fuss or stress, and it will be insulated from 40% Inheritance Tax when she dies and, indeed, for at least another generation after that.
If you want to know more about this, ask your accountant, your financial advisor or your solicitor. At the same time, you might want to ask why they did not mention this to you. Or you can ask Michael Cutler, who wrote this article.
This post was written by Colemans Solicitors LLP