The kind of succession planning that requires a Will is unlikely to be on your mind when you start a business; but it is important if you hope the business will continue as a legacy, or have any kind of business interests that you would like to pass to loved ones.
Wills have always been an important part of succession planning for business owners and investors. Without a Will to direct how your professional interests should be managed, your business could face immediate operational issues and your estate may be dealt with in a way which depreciates its value. Effective succession and inheritance tax planning ensures that when the time comes, assets are passed on to the right people in a way that maximises the available tax reliefs. We call Wills which contain important directions regarding business and professional interests, Business Wills.
In this blog we review the key considerations for business owners and anyone holding business interests, such as stocks or shares, when preparing a Business Will.
Key Considerations for Business Owners
The most common business types are sole traders, partnerships and incorporated companies. Depending on the businesses structure, documents such as shareholder agreements, partnership agreements and articles of association usually set out the basis for how it is owned and managed. It is also possible for these documents to dictate what happens to each owners’ share in the business should they die.
In our experience, these terms are often draconian, leading to forced buy outs, depreciation of value and occasionally even dissolution of an owners share with no benefit to their heirs. It is therefore important to ensure there are adequate business documents with appropriate options for your heirs and surviving business associates to consider on your passing.
It is also important that you deal with your business properly within your Will to ensure that it is administered effectively and passed to your intended heirs. The contents of your Will should reflect the options contained within the business documents and provide heirs with the appropriate legal route to maximise the value of their inheritance.
Below are examples of some of the things you should consider:
- Should you appoint executors who are solely responsible for the administration of your business? While you may prefer for family members to deal with your personal assets, it is often more appropriate for business partners or other professionals such as solicitors to deal with business assets. This can be particularly important if you would like the business to continue operating.
- Do you need to assign trustees to manage business interests for minors? If your beneficiaries are minor children they are not going to be able to manage the business themselves or make decisions as to whether they should retain or sell their share. You could consider setting up trusts or other structures to ensure their interest in the business is looked after by competent people until they can take over themselves. This ensures that the business can continue to operate smoothly and that practical day to day matters can be addressed with ease.
- Are any of your beneficiaries vulnerable? For vulnerable beneficiaries who may never be able to manage the assets themselves, it is important to ensure that a long-term structure is put in place to protect their interests. You could consider whether to set up a trust or appoint an appropriate deputy to act on their behalf. You might decide it is more appropriate for the business, or your share, to be sold and proceeds then held for the beneficiary. Whatever you choose, it is important that your Will provides for the mechanism in which your wishes can be carried out.
- Would you like your employees to receive a share of the business? It is not uncommon for small business owners who have grown their company with a loyal team to want some or all of their employees to receive some value from the business. In this situation you might consider an employee share scheme or a more general share in the profits.
- What are the tax implications? As with other assets, the value of your business may be subject to inheritance tax. A qualified professional can help you consider what reliefs may be available to your beneficiaries, what you can do during your lifetime and what you can do within the terms of your Will to maximise these tax reliefs. For example, we worked with a client who sold his marketing company for a large sum, which had obvious benefits to him in life, but negated the availability of business property relief on death. We subsequently advised and assisted him in the investment of the sale proceeds into vehicles which would qualify for tax reliefs when he died. We can also assist you in managing your personal taxes, such as Income tax and Capital Gains Tax, which are linked to your profit share from your business interests.
Other Business Interests
The above considerations are not just important for people who own a business. They are also necessary if you have business interests such as rental properties, investment portfolios and other stocks and shares.
The way in which these assets are owned will have just as much impact on how they are inherited and how much inheritance tax is paid on your death. For example, rental properties will not necessarily qualify for special inheritance tax reliefs. An effective solicitor can help you structure your portfolio to not only maximise the use of tax reliefs during your life time, but also ensure a smooth transition to your beneficiaries so that they do not pay more inheritance tax than they need to. At Allard Bailey Family Law, we achieve this with a combination of lifetime planning and implementation as well as succession planning through effective Wills.
A Special Note on Investment Portfolios
Investment portfolios are often held in a variety of structures, depending on what your financial advisor believes to be most effective for each investment. If your advisor does not have an overview of your entire estate, it may mean that you minimise your liability for one tax, whilst inadvertently increasing the liability for another tax. It is therefore advisable for your entire estate and holdings to be reviewed periodically.
You should also be aware that if your investments are held in trust they will fall out of your estate so you cannot dictate how these assets are dealt with in your Will.
To ensure that your wishes can be carried out in the best way for you and your beneficiaries, it is advisable to seek professional advice when considering how to plan the succession of your business and other investments. It is also advisable to prepare a detailed Business Lasting Power of Attorney to protect your business in the event of unforeseen absence caused by sudden incapacity. For more information on how we can assist you please contact Sangeeta Rabadia.