Shareholder Protection When Spouses Own Shares: A £10 Million Case Study
No pressure, no jargon. A short call to work out whether this cover fits your business.
How does shareholder protection work when non-working spouses own shares? When non-working spouses own shares, shareholder protection usually insures only the working directors, each for enough to buy their whole family's stake. In a £10 million company owned 25% each by two couples, that means two £5 million policies.
An amendment to the shareholders' agreement adds drag-along rights over each spouse's shares, and a cross option agreement covers the deceased director's own shares.
We recently advised on a case set up exactly like this. Sharing shares with a spouse is common, but it leaves a gap that standard shareholder protection insurance doesn't close on its own. Figures are simplified to keep the maths easy.
Key facts
- The case study company is worth £10 million, split 25% each between two working directors and two non-working spouses.
- Each working director is insured for £5 million: £2.5 million for their own 25% and £2.5 million for their spouse's 25%.
- A cross option agreement covers the deceased director's shares in their estate.
- An amended shareholders' agreement gives drag-along style rights over the spouse's shares.
What did the shareholding look like?
The company had four equal shareholders but only two people running it. The spouses received dividends but had no role in the business.
| Shareholder | Role | Shareholding | Value of stake |
|---|---|---|---|
| Director A | Working director | 25% | £2,500,000 |
| Spouse A | Non-working shareholder | 25% | £2,500,000 |
| Director B | Working director | 25% | £2,500,000 |
| Spouse B | Non-working shareholder | 25% | £2,500,000 |
| Total | 100% | £10,000,000 |
Illustrative figures based on a £10 million company valuation, with each stake valued pro rata.
Why insure each director for £5 million rather than £2.5 million?
Each director is insured for £5 million because the surviving director wants to buy out the whole of the other family's 50%, not just the deceased director's 25%. Insuring only the director's own stake would leave the widowed spouse holding 25% of a business they don't work in, with dividends depending entirely on the surviving director.
That rarely suits anyone. The surviving director wants full control, and the bereaved family would usually rather have cash than a minority stake they can't easily sell.
| Scenario after Director A dies | Director B's family owns | Director A's family owns | Cash paid to Director A's family |
|---|---|---|---|
| No shareholder protection in place | 50% | 50% | £0 |
| £2.5m cover with a cross option agreement | 75% | 25% | £2,500,000 |
| £5m cover, cross option agreement and drag-along amendment | 100% | 0% | £5,000,000 |
Assumes Director A's shares would otherwise pass to Spouse A under their will. Illustrative only.
How were the two £5 million policies set up?
Each director took out a £5 million policy on their own life, written in trust for the other director. If Director A dies, the payout goes to Director B, who uses it to buy both blocks of shares.
| Policy | Life assured | Sum assured | Trust beneficiary | Shares the payout buys |
|---|---|---|---|---|
| Policy 1 | Director A | £5,000,000 | Director B | Director A's 25% and Spouse A's 25% |
| Policy 2 | Director B | £5,000,000 | Director A | Director B's 25% and Spouse B's 25% |
Own life in trust structure. Policy terms and maximum cover levels are subject to insurer underwriting.
The company can pay the premiums, but that creates a benefit-in-kind charge on each director. Where ages or health differ, premium equalisation keeps things fair between them.
Why isn't a cross option agreement enough on its own?
A cross option agreement only binds the people who sign it and the estate of the shareholder who dies. Director A's shares sit in their estate, so the cross option agreement lets Director B buy them and the executors insist on the sale.
Spouse A is a different story. Spouse A's shares aren't part of the estate, and Spouse A never agreed to sell. Without an extra provision, Spouse A could keep them and £2.5 million of the payout would have nothing to buy.
How do drag-along rights deal with the spouse's shares?
Drag-along rights, added by amending the shareholders' agreement, give the surviving director the right to require the deceased director's spouse to sell their shares at the agreed value when a working director dies. Here a standard drag-along clause is adapted and tied to a director's death.
All four shareholders sign the amended agreement. We worked alongside the company's solicitor, who drafted it to cover:
- The trigger: the death of a working director.
- The price: each 25% stake valued pro rata with no minority discount, so £5 million buys exactly 50%.
- The timescale: a fixed window to complete once the insurer pays.
- The articles: a check that the articles of association don't conflict.
What are the tax points for the spouse who sells?
Shares in the deceased director's estate are revalued to market value on death, so selling them soon after usually creates little or no capital gains tax. The surviving spouse's own 25% is a lifetime sale, so any gain is taxed at the capital gains tax rates of 18% or 24% for 2026/27.
| Block of shares | Seller | Capital gains tax position |
|---|---|---|
| Director A's 25% | Executors of Director A's estate | Revalued on death, so usually little or no gain |
| Spouse A's 25% | Spouse A (lifetime sale) | Gain since purchase taxed at 18% or 24% |
Capital gains tax rates for 2026/27 from gov.uk. Individual circumstances will affect the tax due.
Business Asset Disposal Relief usually requires the seller to be an officer or employee of the company, so a non-working spouse may not qualify. It's worth modelling this with your accountant before the agreement is signed.
Could this work for your business?
This structure could suit any company where family members hold shares but only some work in the business. The cover, the cross option agreement and the shareholders' agreement must all point the same way. Find out more about shareholder protection insurance, or read our shareholder protection guide for the wider options.
Frequently asked questions
Do non-working spouse shareholders need their own shareholder protection policy?
Not usually. If a non-working spouse dies, the company keeps trading as normal because the people running it are unaffected, so cover is normally focused on the working directors. The spouse's shares usually pass to their partner under their will, keeping that family's stake intact. Each director's policy is sized to buy the spouse's shares as well, so the spouse's stake is still covered if a director dies.
Does the non-working spouse have to sign the shareholders' agreement?
Yes. A shareholders' agreement only binds the people who sign it, so without the spouse's signature the surviving director can't make them sell. In this case all four shareholders signed the amended agreement, which adds drag-along rights triggered by a working director's death. The cross option agreement then covers the deceased director's own shares, which sit in their estate rather than with the spouse.
What happens if a non-working spouse dies before their partner?
No policy pays out, as only the directors are insured. The spouse's shares usually pass to their partner under their will, keeping the family's 50% intact and the business unaffected. It is worth reviewing the arrangement at that point, because the working director now holds the family's whole 50%, and the cover and shareholders' agreement may need updating to reflect the new shareholding.
How is the price set when the surviving director buys both blocks of shares?
The price comes from the valuation method in the shareholders' agreement. In this case each 25% stake is valued pro rata with no minority discount, so £5 million buys exactly 50% of a £10 million company. Cover should be reviewed as the company's value changes so it still matches 50% of the business, otherwise the payout may fall short of the agreed price.
Can the company pay the premiums on these policies?
Yes, but company-paid premiums create a benefit-in-kind charge on each director as the life assured. The directors can pay personally instead. Where the directors' ages or health differ, premium equalisation can keep the cost fair between them, so neither director subsidises the other's cover. Either way, each policy is written in trust for the other director, so the payout goes straight to the buyer.
Last reviewed: October 2026. Next review: April 2027. Tax rates and thresholds are subject to change. This article will be updated following each HMRC Autumn Budget or Spring Statement where relevant thresholds change.
Written by
Alex Ogden DipFA | Director | Executive Life
Alex Ogden DipFA holds the Level 4 Diploma for Financial Advisers (DipFA) awarded by the Walbrook Institute London, formerly known as the London Institute of Banking & Finance (LIBF). He is authorised by the FCA, Ref: AJO01072. View the FCA register entry.
This article is for information purposes only and does not constitute financial advice. Tax treatment depends on individual circumstances and may be subject to change. Executive Life is authorised and regulated by the Financial Conduct Authority. Always seek professional advice before making financial decisions.