The document provides guidance on using business protection solutions from VitalityLife to protect a business. It discusses key person cover, which insures against the death, illness or disability of important employees. It also covers ownership protection, which ensures funds are available for remaining owners to purchase the shares of an owner who dies or becomes seriously ill. The solutions involve a VitalityLife business protection plan, business trust, and share purchase agreement. Consulting an advisor can help determine the appropriate solution and level of coverage needed for a given business.

1. CLIENTGUIDETO
BUSINESSPROTECTION
EFFECTIVELY PROVIDING FOR KEY PERSON COVER
AND OWNERSHIP PROTECTION
VITALITY.CO.UK

2. Contents
1. Key person cover and ownership protection 3
2. How to arrange the key person cover 4
3. Your questions about key person cover 5
4. Ownership protection 6
5. Business Trust and your questions 7
6. Standard Option agreements – your questions 9
7. Special agreements where shares are owned by
a non-working spouse
13
8. Company share purchase – special considerations 14
Changes to Tax Law
The notes in this Client Guide are based on VitalityLife’s understanding of
the law and HM Revenue Custom’s practice. We have made every effort
to ensure it is accurate but accept no responsibility for our interpretation
of the law, future changes in the law or for any loss you or anyone else
suffer if you act based on any information we’ve given.
In this document the term “spouse” includes a registered civil partner
under The Civil Partnership Act 2004 and any reference to widow,
widower and married couple should be construed accordingly.

3. 3
Many businesses rely on certain key people to trade, without
whom they would struggle financially. Just as a business insures its
assets against fire and theft, it should also consider protecting itself
against the death, serious illness or disability of its key people.
This guide gives you useful information about VitalityLife’s Business
Protection solutions to help you protect your business.
1. Ownership protection
and key person cover
for private businesses
The owners of most small and medium-sized
businesses would face financial difficulties on
the death or serious illness of:
• a person (owner/ manager or employee)
whose presence is important to the tactical
or strategic direction of the business and/
or business revenue/profit generation; and
• a business owner whose share in the
business is to be transferred on either of
those occasions.
Both occasions require funds to be made
available in the right hands at the right time –
and tax effectively.
And that’s where VitalityLife comes in.
Through our specially designed solutions we
make it possible for businesses to ensure that
the required funds are made available – in the
right hands at the right time and tax effectively.
Our key person cover, loan cover and ownership
protection solutions are based on our VitalityLife
Business Protection Plan and, where appropriate,
a draft Business Trust and for ownership
protection a business share purchase agreement.
To ensure that the right solution is matched to
your business needs you should consult your
financial adviser who can help to ensure that:
• you have a clear understanding of the
financial risks you may be exposed to
in relation to business continuation and
ownership protection
• the right person(s) to be insured are
identified
• the amount of insurance cover needed is
quantified
and, where appropriate,
• the right Trust and purchase agreement are
selected.
VitalityLife, working with your adviser, aims
to provide solutions to the majority of business
continuation and ownership protection
challenges.
Key person cover
The need
Regardless of the way in which you carry on
your business (ie. as a sole trader, through a
partnership, limited liability partnership (LLP) or
limited company) there is likely to be the need
for insurance to provide funds on the death
or serious illness or disability of a person or
persons whose absence would lead to serious
financial difficulty for the business.
Assessing the need
Your adviser can assess the level of cover you
need on the life or lives of a key person. The
amount of cover will need to take account of the
need for funds to provide for
• the repayment of any outstanding business
loans
• the repayment of any amounts owed to
the business owner (not applicable to
sole traders)
• replacing lost/reduced profits
• providing for additional or commercial costs
(eg redundancy).
From this total should be deducted the amount
of any existing insurance in place to cover
these risks.

4. 4
2. How to arrange the
key person cover
Business Key person Method
Sole trader Sole trader
Plan effected by sole trader on their own life and held on
discretionary Trust for family/dependants. Serious illness
Cover held for the benefit of the sole trader.
Sole trader Employee
Plan effected and owned by the sole trader on the life of
employee.
Partnership Partners
Either
(i) each partner effects Plan on his own life subject to a
business trust for their co-partners, or
(ii) one or more partners effect a Plan on the life of the key
partners subject to a special Partnership Trust
Partnership Employees
One or more partners effects a Plan on the life of the employee
subject to special Partnership Trust for the benefit of the partners.
Limited
company
Shareholding
Director
Either
(i) limited company effects and owns Plan on the life of the
“key” share-holding director (most likely)
or
(ii) “key” shareholding director effects a Plan on their own
life subject to a Business Trust for the benefit of their co
shareholders (usually more costly post tax)
Limited
company
Employee
Limited company effects and owns the Plan on the life of
“key” employee.
Key person cover is designed to give financial
protection to the business in the event of the
death or serious illness of a key employee or
owner. How the insurance is put into force and
who owns the insurance will depend on how
your business is set up and who the key person
to be insured is.
The following summarises how the VitalityLife
Business Protection Plan (the Plan) can be
used as the cornerstone of a key person cover
solution for the following businesses.

5. 5
Tax
Will premiums payable under the
VitalityLife Business Protection Plan for key
person cover be eligible for tax relief?
It depends. Relief will not be available if the Plan
is an own life plan effected in trust. In cases
where an employer effects the Plan on the life of
an employee, relief will only be available for the
employer if the Plan is for an appropriate term
(ie. related to the risk being covered), is to cover
a “revenue” loss (so not a loss related to capital:
so premiums paid on loan cover would not be
deductible) and is not on the life of an owner of
the business.
This means, in effect, that premiums would only
be relievable if paid under a suitable term Plan
on the life of an employee to protect against
loss of profits or revenue. Premiums payable
under any Plan on the life of a business owner
(for whatever purpose) would generally not be
tax relievable.
Will the sum assured be taxable?
Broadly speaking, if there has been no tax relief
on the premiums there should be no tax on
the sum assured – payable on death or serious
illness.
You should seek advice from your adviser on
all aspects of taxation in relation to key person
cover.
Policy term
How long should the Plan term be?
The term should relate to the length of time
you believe the risk that you are covering will
exist for. The VitalityLife Plan has a provision for
review.
How about loan cover?
The Plan should run for the length of time you
believe the loan will be outstanding.
The amount of cover
How much cover should be put in place
under the Plan?
This is directly related to the risk being covered,
your adviser will help you to assess how much
cover you need – and how long you need it for.
As for all life assurance, you should, with your
adviser, regularly review the appropriateness of
both the amount of cover in place and the term.
What if the need for cover changes or
disappears?
The VitalityLife Plan is flexible. It can be
varied (increased or reduced) or cancelled
as required.
How the sum assured is paid and used:
Who is the sum assured paid to?
If the Plan is not in Trust it will be paid to the
owner(s) of the Plan eg to the partners (in a
partnership), the LLP or to the company. If the
Plan is in Trust the sum assured will be paid to
the Trustees to pay to the beneficiaries under
the Trust, eg. the family/dependants of a sole
trader, or the partners/shareholders if a Trust
is used to provide for key person cover for
these businesses.
In the case of a Plan in trust, the eventual
recipients (eg partners, shareholders) would,
typically, lend the Plan proceeds to the business
to provide the required funds to replace lost
profits/revenue.
What is the special Partnership Trust?
Under this Trust the beneficiaries are all the
partners for the time being it the business. In
effect, the Plan, or its proceeds, belong to the
business, rather than individual partners. Each
partner will be entitled to share in the proceeds
in the same way as they share in the capital of
the business.
A special separate guide is available for this
Trust to which you should refer if you are a
partner and there is a need for key person cover
on one or more but not all the partners. The
Partnership Trust should not be confused with
the Business Trust.
3. Your questions
about key person
cover answered

6. 6
The need and the solution
A properly constructed ownership protection
arrangement will enable shareholders in a
limited company, partners and members of
a LLP to ensure that on the death and/or the
serious illness or disability of any of them;
• The surviving business owners will be able to
continue running and owning the business; and
• The family/dependants of a deceased
owner or a seriously ill owner will receive
suitable financial “compensation” for their
share of the business.
This type of arrangement will suit most types of
business. The most obvious exceptions are:
(i) completely family-owned businesses where
the business share is likely to pass without
payment to other family members, eg
children, in the event of the death or serious
illness of an owner; and
(ii) a partnership where it has been agreed
that on the death and/or serious illness of a
partner, their share of the value of goodwill
will “automatically accrue” to the continuing
partners.
However, even in both of these cases it is likely
that there will be a need for some financial
compensation.
For example:
(a) To a family member (who does not inherit
or otherwise receive the business share in
a family business) for the loss of any
amount reflecting the business share; or
(b) To the relatives of a deceased owner who
is party to an automatic accrual clause.
The VitalityLife Business Protection Plan could
have an important role to play in either of
these situations as a provider of “financial
compensation”.
An alternative solution for shareholders in
private companies
In certain circumstances it is possible for
a limited company itself to purchase the
deceased’s shares. Once purchased, the shares
are then cancelled.
With such a company share purchase, the
company itself would effect a policy on the
life of the shareholder to fund the potential
purchase. No trust will be necessary.
This may sound like a simpler option but there
are a number of company law requirements that
must be satisfied and so such arrangements
must not be made without involvement of your
professional advisers.
More details on this option are in section 8 of
this Guide.
The VitalityLife ownership protection
strategy:
The key components in an effective ownership
protection strategy are:
• an appropriate option (business share
transfer) agreement
• a VitalityLife Business Protection Plan
• a VitalityLife Business Trust
VitalityLife provides all the documents you’ll
need to facilitate the delivery of a “whole”
solution:
• A draft Business Trust; and
• Several draft option agreements:
(i) a “standard” agreement for non-related
business owners;
(ii) an agreement which also deals with a share
of the business of a non-working spouse;
(iii) an agreement to facilitate company
purchase of the shares; and
(iv) single and cross option agreements in the
event of death or serious illness of a
business owner
All of these are available in versions that apply
on an Owner’s death or on an Owner suffering a
serious illness.
All of these important supplementary
documents are provided as drafts for the
approval of your legal advisers. VitalityLife
has taken all due care in the preparation of
these drafts and are confident that it will be
appropriate to provide for the majority of the
ownership protection needs of partnerships,
LLPs and limited companies. However, different
considerations will apply to different businesses
and that is why it is important to consult your
professional advisers.
Essentially, the aim is to provide a tax-free sum
of money in the hands of continuing business
owners on the death or serious illness of any
one of them so that, the funds can be used
to buy the business share of the deceased or
seriously ill owner either:
(i) from that seriously ill owner; or
(ii) from the personal representatives of the
deceased owner,
leaving the continuing business owners in
control of the business and the seriously ill
business owner or their family/dependants
following death with an appropriate amount
of financial compensation.
4. Ownership
protection

7. 7
5. Business Trust –
your questions
What is the VitalityLife Business Trust?
A trust is a legally effective way of holding
an insurance policy or any other asset, usually
for the benefit of others.
A business trust is a special type of trust used
in business protection arrangements between
business owners in this guide.
The draft VitalityLife Business Trust is designed
for use with VitalityLife Business Protection Plan.
When a Plan is held subject to trust, the Trustees
will be the legal owners of the Plan and when
the Plan benefits are paid on the death or
serious illness of the life assured, they will
be paid to the Trustees to hold or use for the
benefit of the trust beneficiaries in accordance
with the trust terms. All the owners taking part in
the arrangement will normally be the Trustees of
all Plans effected by the owners.
To ensure that there are no adverse tax implications,
the trust beneficiaries will include only the life
assured and their co-owners in the business.
What is the purpose of the VitalityLife
Business Trust?
The draft VitalityLife Business Trust may only be
used in conjunction with business protection
arrangements between the owners where funds
are required to enable co-owners to purchase
a deceased or seriously ill owner’s share in the
business (“Share”) (or, in some cases (see above),
to provide for key person cover).
Thus the main purpose of the VitalityLife
Business Trust is to ensure that the proceeds of
the Plan that are paid on the death or serious
illness of the owner, are available quickly and
tax-efficiently to the co-owners to enable them
to purchase the deceased or seriously ill owner’s
Share if the relevant option to sell or purchase is
exercised or, if the purpose of the arrangement
was to facilitate key person cover, to use the
funds in whatever way is best to protect the
wellbeing of the business.
If the aim is to provide funds for ownership
protection, then along with effecting the
VitalityLife Business Protection Plan subject to
the Business Trust, the owners would enter into
an appropriate option agreement for the sale of
the Share of each of them on death or serious
illness giving rise to a payment of benefit
under the Plan. Drafts of such agreements are
provided separately by VitalityLife and are
considered later in this guide.
When would the VitalityLife Business Trust
be suitable?
The draft VitalityLife Business Trust may be
suitable if:
• you are a business owner, i.e. a partner
in a partnership, member of an LLP or a
shareholder in a private limited company
• you and your co-owners are entering into an
arrangement so that in the event of the death
or serious illness of any of you, funds will be
available to buy the Share of the deceased or
seriously ill owner should the exercised; or
• you or one of your co-owners are a key
person in the business and funds may be
required to provide cover for loss of profits
arising as a result of the death or serious
illness of such a key person.
When would the VitalityLife Business Trust
not be suitable?
The draft VitalityLife Business Trust will not be
suitable if:
• you are effecting the Plan for the benefit of
your family or dependents who are not part
of the business protection arrangement
• you are not entering into a business
protection arrangement with your co-owners
• the plan is being effected by your
Company for share purchase or by an
Employer for key person cover purposes
How is the VitalityLife Business Trust
established?
The draft VitalityLife Business Trust may only be
used in conjunction with a VitalityLife Plan and
should only be used after you have consulted
your professional adviser about its suitability.
The Trust is established by the applicant (the life
assured) completing the trust request form at the
same time as applying for the Plan. It is essential
that the trust is effected only at the time the Plan
is applied for and not later, in order to avoid
unnecessary adverse tax implications.
Following the issue of the Plan, the life assured,
who will be the initial trustee of the trust, should
appoint additional Trustees of the trust. The
additional Trustees would normally be his/her
co-owners taking part in the business protection
arrangement. A separate draft deed of
appointment of additional Trustees is provided
by VitalityLife for the approval of the parties’
legal advisers.

8. 8
What are the key provisions of the
VitalityLife Business Trust?
• The draft VitalityLife Business Trust is a
flexible (interest in possession) trust.
• If the Trustees do not appoint the trust
benefits within 125 years of the date
of the trust’s inception, the default
beneficiaries (the particular owners defined
in the trust as such) will benefit. The settlor
may name the default beneficiaries and the
shares in which they are to benefit in the
trust document. This will only be necessary
if they are other than all the current co-
owners of the settlor or if they are to
benefit in proportions other than those in
which they own the business between
them. Normally the default beneficiaries
would be all the current co-owners of the
settlor and they would benefit in the
same proportions as they own the business
between them (ignoring the settlor’s Share).
• If the life assured (settlor) leaves the
business otherwise than following a serious
illness covered by the Plan, then the
benefits of the Plan will revert to the
settlor absolutely (as the trust will then
become redundant) and the Plan will then
provide protection to the settler as a
personal protection plan and not a business
protection plan
• To make sure that there are no unwanted
tax implications, no person other than
the co-owners involved in the business
arrangement will be a beneficiary. There
is a clause in the trust which ensures that
this will be so.
• The draft Trust offers a choice of applicable
law depending on where the settlor lives
– this can be the law of England and Wales,
law of Scotland or the law of Northern
Ireland. The beneficial provisions of the
trust as well as the tax implications of the
trust are the same in all the parts of the UK.
What are the tax implications of the
VitalityLife Business Trust?
• Provided the arrangements between the
owners are entered into at arm’s length,
on a commercial basis (i.e. that no gifts
are involved), there will be no adverse
inheritance tax (IHT) implications. This
means that there will be no IHT to consider
in relation to the premium payments and
that the benefits payable under the
VitalityLife Business Protection Plan
will be paid free of tax to the Trustees.
• There may, however, be IHT and/or capital
gains tax (CGT) implications for the settlor
(or his legal personal representatives after
his death) when he/they dispose of his Share
to his co-owners (who will have received the
funds from the Trustees to pay for the Share).
These implications will depend on the
type of business and the price paid; and you
should discuss these matters in detail with
your financial adviser.
• To ensure that the arrangement is on a
commercial basis, only the individuals
who enter into the business protection
arrangement and each of whom effects a
Plan under a similar Trust can be beneficiaries
under the VitalityLife Business Trust. It is also
important that each individual contributes an
amount to the overall cost of the premiums
under the relevant policies that reflects the
benefits that may be received under the
Trusts. . If there is a large disparity in premium
payments in respect of the individual owners’
Plans, a form of premium “equalisation” may
be necessary to ensure that no element of
gifting is involved. This would be particularly
important if the Owners are related as it is
more difficult to prove that parties are dealing
at “arm’s length” when they are related. The
owners will need to consult their professional
advisers on this point.
• Once the Plan benefits have been paid to
the trustees, if they are not immediately paid
out to the beneficiaries, they may be held by
the trustees, for example, in a bank account,
pending the decision on how they should
be used. In such circumstances any interest
arising from such funds will belong to the
default beneficiaries under the trust, ie. the life
assured’s co-owners of the business As such
they will be subject to income tax on such
interest whether they actually receive it or not.
• There will be no income tax or capital gains
tax liabilities on any capital payments received
from the Trust by the beneficiaries, ie. the co-
owners – see below for the IHT position.
• If funds are held by the Trustees for a long
period and are invested in other assets
there may be income tax and, possibly,
capital gains tax implications to consider.
The Trustees should obtain suitable advice
before making an investment and take the tax
implications of the relevant investments into
consideration at that time.

9. 9
• For inheritance tax the Trust is treated
as “relevant property” which means that
potential IHT charges may apply every 10
years and/or when payments are made
out of the Trust. This is despite the fact that
the premium payments will not be subject
to IHT provided the arrangement is fully
“commercial” (as explained above). The
maximum charge could be 6% of the value
of the trust fund but usually it will be less
than that or even nil. The Plan itself will have
no value unless the life assured is in poor
health (this will be relevant at the 10 yearly
anniversaries) or the benefit has been paid to
the trustees by VitalityLife following the death
or serious illness of the life assured.
In practice, it is expected that in most cases no
IHT charges will arise. When the sums assured
under the Plans are very large (in excess of
the nil rate band for IHT), and so the potential
charges may be of concern, there are strategies
that can be employed to minimise the risk of
charges. Your financial adviser will be able to
advise you on the appropriate course of action if
this is relevant to your circumstances.
• As the settlor is included as a potential
beneficiary under the VitalityLife Business
Trust there is a possibility that the income
tax pre-owned assets tax (POAT) charge
applies. However, in practice, it is unlikely
a charge will arise because in most cases
the Plan will have no value and the POAT
charges do not start to bite unless the value
of the benefit of the asset in question (plus
the benefit of all other assets of the same
individual subject to the POAT) is more
than £5,000 in a year. Again, your financial
adviser will be able to explain if this is
relevant to your situation and, if so, what
the implications are.
6. Standard Option
agreements – your
questions
What is an option agreement?
An option agreement is an agreement which
gives a person an option to effect a certain
transaction, usually to purchase or sell
something, in the future. The partners in a firm,
members of a LLP or shareholders in a limited
company can, for example, enter into option
agreements for the sale and purchase of their
business interests (their Shares) in the event of
any one of them dying or becoming seriously
ill. Although the agreement is in the form of an
option, if either side exercises their option the
other side is bound.
Why is an option agreement used as
opposed to a binding sale/purchase
agreement?
If the owners are satisfied that they wish to enter
into an arrangement for sale and purchase of
their Shares, why not simply make an agreement
to buy and sell?
The reason an option agreement is used is to
preserve inheritance tax business property relief
(normally 100%) on the Share on death. If the
surviving co-owners had to make a purchase
then this would amount to a binding sale
agreement and business property relief would
be denied.
VitalityLife offers two drafts – one for purchase
on the death of an owner, and another for
purchase following seriousillness of an owner.
What are the legal and commercial effects
of a ‘standard’ option agreement?
An option agreement is entered into on the
basis that each Owner has effected a VitalityLife
Business Protection Plan which is made subject
to the VitalityLife Business Trust for the benefit
of the other owners. The funds to make the
purchase will then be provided by the Plan.
The draft agreements provide that unless
otherwise agreed by all of the owners, on the
exercise of the relevant option the surviving or
continuing owners will purchase all of the Share
of the deceased or seriously ill owner. If there
is more than one continuing owner, the Share
of the deceased or seriously ill owner will be
bought in such proportions as the other owners
own the business between them, ignoring the
Share of the deceased or seriously ill owner.
For example, if there are three owners owning
equal Shares, and one of them dies or becomes
seriously ill, and the relevant option is exercised,
the remaining two will be required to purchase
the deceased or seriously ill owner’s Share
equally ie. 50/50.
The agreement specifies that each party must
have effected a VitalityLife Business Protection
Plan subject to a VitalityLife Business Trust for
the benefit of the other owners.

10. 10
The agreement also makes provision for what
should happen if the benefit payable under the
Plan is more or less than the agreed purchase
price (see later) of the Share.
The option agreement on serious illness can be
on a single option or cross (double) option basis.
A cross option agreement applies for business
share purchase following the owner’s death.
What does the standard “death” cross
option agreement provide?
The VitalityLife draft cross option agreement for
purchase on death provides that, in the event of
the death of any party to the agreement (being a
partner, member or shareholder in the business
– “an owner”), the legal personal representatives
of the deceased owner will have an option to
sell his business interest (being a share in a
partnership,interest in a LLP or a shareholding in
a limited company) to the remaining owners and
the surviving owners will have a corresponding
option to buy.
As long as one of the parties exercises their
option, the sale/purchase will go ahead. An
agreement in this format preserves valuable
business property relief and thus ensures that
the value of the business share ( provided the
business is a trading business and the Share has
been owned for at least two years) is effectively
ignored for IHT.
What are the key provisions of the
‘standard’ VitalityLife cross option
agreement for the purchase of a Share on
the death of an owner?
• The time limits for ‘sell’ and ‘buy’ options are
six months and three months from the date
of death respectively (or one month after the
grant of representation is issued if later).
• The parties buying the Share will be buying
in the proportions in which they own
the business (ignoring the Share of the
deceased).
• The agreement includes the basis for setting
the price for the Share to be purchased.
The parties to the agreement (ie. the Owners) can
specify the value of their Share for the purposes
of the agreement and such a specified value will
be valid for one year. If no value is stated, or any
specified value is not reviewed every year, the fair
market value will apply. The tax implications of
specifying the value of a Share for the purpose of
the agreement are considered below.
Specifying a value is only really appropriate
where the Owners involved are of a similar age
and state of health with similar sized Shares and
where they are independently advised, with
the value specified in the agreement being the
market value of the Share at that time.
• The agreement also deals with funding
the purchase through VitalityLife Business
Protection Plans and makes provision for a
situation when the sum assured payable
under the Plan is less or greater than
the purchase price. The parties must
decide which of the alternative wordings
is appropriate in their circumstances and
complete/delete as appropriate.
Standard Option agreement for business share
purchase following the owner’s serious illness
or disability.
What are the key provisions of the
VitalityLife standard option agreement
for the purchase of a Share following an
owner’s serious illness or disability?
(i) The choice of option
The agreement gives the owners the choice of
either:
• A cross option agreement, ie with both sides
having respectively the option to buy and
the option to sell in the event of an owner
becoming seriously ill and such event being
covered by the VitalityLife Business Protection
Plan; or
• A single option agreement where, in the
event of an owner becoming seriously ill and
such event being covered by the VitalityLife
Business Protection Plan, then only the
seriously ill owner will have an option to
sell their business interest (“Share”) to the
remaining owners.
Under the cross option agreement if either side
exercises their option, the purchase will take
place – in effect the other owners can force the
seriously ill owner out of business. Under the
single option agreement only the seriously ill
owner has an option to sell his Share, and so
cannot be forced to sell.

11. 11
You should discuss the choice of agreement
(single or cross option) between all the owners
and take guidance from your financial adviser
before deciding which is suitable in your
circumstances.
(ii) The time limits for sale and purchase
The time limits for the exercise of the ‘sell’
and ‘buy’ options (the latter only if the cross
option basis is chosen) are twelve months
and six months from the date of payment of
the benefits under the VitalityLife Business
Protection Plan respectively.
The remaining provisions are similar to those
included in the cross option agreement on
death – see above.
Some further important questions in relation to
the option agreements operating in relation to a
purchase following death or a serious illness.
When may a VitalityLife option agreement
be suitable?
The draft option agreement for purchase will be
suitable if:
• You and your co-owners are entering into a
business share purchase arrangement funded
by a VitalityLife Business Protection Plan held
subject to a Business Trust.
• If the Plan includes Disability Cover for Business
you have decided whether, in the event of the
serious illness of any of the owners, it is only the
seriously ill owner who should have the right
to sell (single option agreement) or whether
the co-owners should be able to force a sale
following the serious illness of any of them
(cross option agreement).
When may a standard VitalityLife option
agreement not be suitable ?
The draft option agreement for business share
purchase will not be suitable if:
• There is already an agreement for business
share purchase on death or earlier serious
illness in place and it is not desired to replace it.
• You are effecting cover only for key person
cover purposes.
• Not all of the owners are taking part in
the arrangement for ownership protection
involving funding with a VitalityLife Business
Protection Plan subject to a Business Trust.
• If an agreement is required for a purchase
of shares between you and your company; or
• If non-working spouses of Owners also
own shares in the Business.
Separate draft agreements (detailed in section
8) are available for the latter two cases.
How are the option agreements for sale
and purchase on death and serious illness
established?
The VitalityLife option agreements for the sale
and purchase of an Owner’s Share are provided
as drafts for the approval of the Owner’s legal
advisers. The agreements are established by
the Owners completing the relevant parts of the
agreements. Two separate drafts are offered as
in some cases only provisions for purchase on
an Owner’s death, and not on serious illness, will
be required.
With the option for purchase on serious illness
the parties to the agreement must choose
whether only the option to sell should apply
(single option) or whether the cross option should
apply. You must discuss which is appropriate to
your circumstances between yourselves with the
guidance of your financial adviser.
The parties must also decide which provisions
should apply if the benefit payable under
the Plan is less or more than the agreed
purchase price.
The agreement has a Schedule in which the
specified value of each owner’s Share may be
inserted. The specified value is the value that
will be paid for the Share. One way of arriving
at the specified value will be to agree the
value of the whole business and then take the
value of each owner’s Share as an appropriate
proportion of this.
The agreement needs to be completed in
conjunction with applications for VitalityLife
Business Protection Plans and the Business Trust
requests being made by all the parties to the
arrangement. It is important that Business Trusts
for the Plans take effect from the moment that
the VitalityLife Plan is in force so as to avoid any
unwanted capital gains tax consequences in
relation to the payment of the sum assured.

12. 12
What are the tax implications of the
standard option agreements?
In order to explain these clearly we have
adopted a chronological approach to the
actions and transactions involved.
A. Entering into the option agreement
Although, strictly speaking, a grant of an
option is a disposal for capital gains tax (CGT)
purposes, there will be no immediate tax
implications for the parties entering into the
option agreement if the purchase is to take
place at market value. If the specified value
alternative is chosen then again, as long as it is
arrived at on a commercial basis, ie the specified
value reflects a commercial price and the
owners are, broadly speaking, of similar age and
in good health and are independently advised,
there will be no immediate tax implications.
B. Exercise of an option to purchase/sell
under the VitalityLife option agreement
following the death of an owner
Following the death of an owner the value of
their Share would be included in their estate
and pass in accordance with the provisions of
their Will (or intestacy if there is no valid Will).
However, if an option to buy or sell is exercised
(see below), the legal personal representatives
(LPRs) of the deceased, ie. executors or
administrators, will be obliged to sell the
Share as part of their duties to carry out in the
administration of the deceased’s estate. As a
result the proceeds of the Share will pass to the
beneficiaries under the Will in “return” for the
sale of the Share.
It is expected – that in most cases the business
will be a trading business so that the Share will
qualify for 100% business property relief. This
would mean that no IHT would be payable on
the death of an owner.
The exercise of the option to sell by the LPRs of
the deceased owner or the option to purchase
by the surviving Owners, would result in the sale
of the deceased’s Share to the surviving Owners.
A sale of a business interest is a disposal for
capital gains tax purposes.
The usual CGT rules will apply. However, the
Share would normally have been revalued on
death so as long as the sale is at a price equal
to or close to the value at death, there will be
no CGT or IHT implications. The position may
be a little more complex in some cases if the
specified value formula has been used – your
financial adviser will be able to explain the full
implications if this applies to you.
C. Exercise of the option under the
VitalityLife option agreement following the
serious illness of an owner.
The exercise of the option to sell by a seriously
ill owner – or the option to purchase by the
other owners if the parties had chosen the cross
option provisions, would result in the sale of the
seriously ill owner’s Share to the co-owners.
A sale of a business interest is a disposal for CGT
purposes. The usual capital gains tax rules will
apply. In particular, entrepreneurs’ relief may be
available subject to the usual conditions.
Provided the sale/purchase is made at arm’s
length (as is anticipated) there will be no
inheritance tax implications.

13. 13
7. Special arrangements
where shares are
owned by a non-
working spouse
In many businesses, often for tax reasons,
Owners choose to share the entitlement to
the capital (and often income) of the business
with their spouses who are not directly
involved in the running of the business. In such
circumstances, it is anticipated that on the death
of a non-working owner, they would leave their
shares to their spouse via a Will. However, the
working Owners may require an agreement
which would provide that if one of the working
owners were to die, the other working owners
would have the option to buy the share of the
deceased as well as the share of the spouse of
the deceased. VitalityLife provides draft option
agreements that allow for such an arrangement
in the event of death or serious illness of a
working owner.
How does the arrangement work where
there are non-working spouses involved?
In the drafts the term “Primary Owner” is used
to describe a working Owner and the term
“Secondary Owner” is used to describe the
spouse or civil partner of a Primary Owner who
owns a share but is not involved in running the
business.
The option agreement on death is similar to
the “standard” option agreement on death
described in section 6 above except that it
provides that the shares of both the Primary
Owner and the Secondary Owner will be
bought/sold in the event of death of the Primary
Owner.
The option agreement on serious illness is
also similar to the “standard” agreement for
purchase on serious illness described in section
6 above, except that it deals with the sale/
purchase of the shares of both the Primary
Owner and Secondary Owner following serious
illness of the Primary Owner.
In either case, the purchase will only be made by
the other Primary Owners.
How is the share purchase under this
agreement funded?
Share purchase under the draft agreement is
contemplated only on death or serious illness of
a Primary Owner. This means that funds will be
required following the death or serious illness of
such an individual. To fund the purchase it will
be necessary for each Primary Owner to effect
a VitalityLife Business Protection Plan subject to
a Business Trust. Under each Primary Owner’s
Business Trust only the other Primary Owners
will benefit as only the Primary Owners will be
effecting the purchase.
There will be no Life Cover on the Secondary
Owner and the Secondary Owner will not
benefit from the trusts.
If on the death of a Primary Owner the Share of
a Secondary Owner to whom they are married
is also to be sold/purchased, the sum assured
under the Plan on the life of the Primary Owner
must be sufficient to fund the purchase of the
Shares of both the Primary Owner and the
Secondary Owner.
Why are Secondary Owners excluded from
benefiting under the Business Trusts?
Under the terms of the VitalityLife Business
Trust, in order to preserve commerciality, a
business owner cannot benefit under the trust
of another unless he or she has also effected
a Plan in trust for their co-owners. This is one
of the reasons why the non-working spouses
are excluded from all benefit and will not be
participating in purchasing of any shares on the
death of the other co-owners.
What are the tax consequences of the
sale/purchase of business shares of
both Owners ?
• Purchase of the deceased Primary Owner’s
Share.
The tax consequences are similar to those under
a standard agreement dealt with in section 6.
• Purchase of the surviving Secondary Owner’s
Share
On the sale of the Share during lifetime the
normal CGT rules will apply, namely that capital
gains tax may be payable on so much of
the gain as exceeds the Secondary Owners
available annual exemption. The disposal may,
of course, qualify for entrepreneurs’ relief to
reduce the rate of tax payable.
• Purchase following serious illness of
Secondary Owner.
The tax consequences for both Owners will be
as for any purchase during lifetime as described
above.
Can a corporate share purchase arrangement
be used to buy the shares of a Secondary
Owner?
Yes. However, whilst this is possible, it would
not normally be recommended because, on
cancellation of the shares, all other shareholders
would then benefit proportionately which may
not be what is desired.

14. 14
8. Company share
purchase – special
considerations
How does a company share purchase using
an option agreement on death work?
A limited company and one of its shareholders
enter an agreement which provides that if the
shareholder were to die, the company would
have the option to buy the deceased’s shares in
the company and the personal representatives
of the deceased shareholder would have the
option to sell the deceased’s shares back to the
company.
The key provisions of the option agreement
and the mechanics of the arrangement are
similar to those described in section 6 above in
connection with option agreements between
business Owners.
What about the purchase on serious illness
or disability?
There is an equivalent draft agreement between
a company and the shareholder. As with the
“standard” option agreement described in
section 6 above, that is a choice of cross option
and single option.
What are the legal requirements that need
to be satisfied before a company can buy
its own shares?
The following are the main requirements under
the Companies Act 2006.
• The Company’s Articles of Association should
not restrict or prohibit a purchase of its own
shares.
• The share purchase must not leave the
company with only redeemable and/or
treasury shares.
• A private company must use distributable
profits to purchase the shares before it can
resort to capital.
Additional safeguards are required where the
purchase is to be made out of capital. You
must discuss these matters with your advisers
before deciding whether company share
purchase is suitable.
Professional advice will also be necessary at the
time of purchase to ensure compliance with all
the legal requirements.
How should the funds necessary to enable
the company to purchase the shares be
provided?
It is expected that the company will effect a
VitalityLife Business Protection Plan on the life
of the shareholder. The company must have
the power to effect any life policy and sufficient
insurable interest in the person on whose life the
policy is effected (normally both would exist).
Can it be guaranteed that the company will
be able to use the proceeds of the policy to
buy the shares of the deceased shareholder
following the shareholder’s death?
There is a requirement that the directors
must be able to give a (justifiable) statement
of solvency as one of the conditions of
company share purchase. In addition, there
is a requirement to publicise the intended
purchase. So if a company has substantial debts,
the directors may not be able to provide the
required solvency statement. In addition, the
company’s creditors may object to the company
capital being spent on share purchase if this
could, in their view, prejudice their interests.
Therefore there can be no absolute guarantee
on this.
What are the tax consequences of an
option agreement involving a company?
The tax implications will be broadly similar to
those involving “standard” option agreements
between Owners as described in section 6
above. Your financial adviser will be able to
explain this in further detail.
What are the tax implications of the actual
share purchase?
When the company makes a payment in return
for the shares, there are two possibilities: the
payment may be treated as a capital payment
subject to potential capital gains tax in the
hands of the vendor; or as a distribution from
a company which would be subject to income
tax. Clearly the preferable option is the capital
treatment and this treatment can be confirmed
by the parties obtaining clearance from HMRC
before the purchase occurs. There are special
conditions to be satisfied for the “capital
treatment” to apply - you should discuss this
with your financial adviser.
On the basis that the purchase is treated as a
capital transaction if the sale follows the death
of the shareholder the shares will be revalued
on death for CGT purposes (meaning that little
or no gain would arise on a sale made relatively
soon after death).
For purchase following serious illness, the
entrepreneurs relief will usually apply - see
section 6 above.

15. 15

16. VitalityLife is a trading name of Vitality Corporate Services Limited. Registered number 05933141. Registered in England
and Wales. Registered office at 3 More London Riverside, London, SE1 2AQ. Vitality Corporate Services Limited is
authorised and regulated by the Financial Conduct Authority.
PRUPM10949_01/2015
Part of the Discovery Group