Have you thought about how you will leave your business in your Will? There are a number of issues which business owners need to consider when thinking about succession planning.
(1) Who will inherit your business?
Who would you want to receive your business, if you died? You may be fortunate enough to have one or more adult children who already work in the business, and in that case you may well be glad to transfer it to them on death, if not before. You will probably also wish to give some thought to how you can balance things up for your other children, so that they each benefit equally from your estate, overall.
If there is no obvious successor within the family, you probably envisage your executors selling your interest either to your surviving business partners or to a third party, with the sale proceeds going to your beneficiaries.
(2) Check your Partnership Agreement or Articles of Association
When considering your Will, it is important to check the founding documents of your business – either your partnership agreement or a company’s Articles of Association – to see whether or not they provide for what happens on the death of a partner or shareholder.
A partnership agreement may, for example, contain ‘offer round’ provisions setting out that on the death of a partner, the surviving partners will have first refusal on purchasing the deceased partner’s interest in the business. It may also deal with the basis on which partnership assets would be valued. If your partnership agreement is silent in this regard, or if you do not have one in place, then the default position is that the Partnership Act 1890 will apply. Clause 33 provides that in this scenario, a partnership is automatically dissolved by the death of any partner. The amount due to the partner who has died is then paid to his executors. You and your partners may well wish your partnership to continue if one of you was to die, and so this alone is a good reason to have in place at least a straightforward partnership agreement.
If your business is a company, you can leave your holding to whomever you wish, subject to any pre-emption rights contained in the company’s Articles of Association. If you would prefer to avoid pre-emption rights, you can amend the Articles in this regard with a 75% shareholder majority.
(3) Business Property Relief from Inheritance Tax
Whether you are a sole trader, a partnership or a private company, business property relief (“BPR”) from Inheritance Tax is often available at 100% on the value of your interest in the business on death, under Inheritance Tax Act 1984 s 103 – 144. BPR is available at 100% on a business, an interest in a business and unquoted shares in a company. It is also available at 50% on listed shares which gave the transferor control of a company and any land, buildings, plant or machinery which was used by a partnership or company of which the transferor had control. Relief is given on the net value of the business, and is not available on excessive amounts of cash deposited in the business.
BPR will only apply if you have owned the assets in question for at least 2 years prior to your death. Broadly speaking, relief is not available on businesses whose main activity is making investments, so for example buy-to-let residential and commercial landlords, holiday lettings or caravan sites will not qualify, although B&Bs and hotels usually do. If you have a ‘mixed’ business where some of the activities will qualify for BPR and some will not, it may even make sense to divide the activities into two separate businesses, to avoid the ‘qualifying’ business activities losing their valuable tax relief.
As a result of BPR, it can be very tax-efficient to make a gift of your business to your adult child, who is a ‘chargeable beneficiary’ for inheritance tax purposes, as opposed to it passing free of inheritance tax to your husband/wife, but then being subject to 40% tax on your spouse’s eventual death, when BPR may no longer be available.
You may wish to leave your business to your children if it qualifies for tax relief, but to your spouse if it does not. If it is currently uncertain whether or not your business is going to qualify for relief on death, you can hedge your bets by leaving it to a discretionary trust for the benefit of your spouse and children. The trustees of your Will trust can then assess the position when the time comes, and appoint the business out to your spouse or your children, depending on the availability of BPR. If BPR turned out to be unavailable, all would not be lost; the business would be appointed out to your spouse free of tax, and then it would then be open to them to transfer it to your children as a lifetime gift. If your spouse survived the gift by 7 years, there would be no inheritance tax to pay on the transfer to your children.
(4) Ideas for Business Provisions in your Will
- If you are leaving your business to a successor or business partner, it often makes sense to make that person a ‘special executor’ of that part of your estate, as they will be best placed to deal with it.
- A gift of an interest in a business usually includes all of the plant, machinery, vehicles, software etc used in carrying on the business, along with the goodwill.
- You could consider making your legacy of your business subject to inheritance tax, if any, so that it will bear its own tax.
- You could give your trustees express power to carry on the business for as long as they think fit, as well as power to sell it, in case this proves helpful in maximising the profit on an eventual sale.
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