Will
your demise signal the end of your business?
Article
by Michael
Osborne of Wright
Hassle Solicitors
George
Bernard Shaw wrote that life was not to be likened
to a brief candle but to a "lasting torch" that
could be passed on to the next generation.
Although
he probably didn’t have business succession
planning in mind, his comment is certainly applicable
to the process of ensuring that a family business
outlives its founders.
An estimated two thirds of family businesses do not survive beyond the first
generation of owners. A proportion of these failures can be directly attributed
to inadequate succession planning. It is not only death but also disability
or retirement that can destroy a business and interfere with plans for its
successful continuation. Ensuring the right arrangements are put in place will
help. |
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Sole traders
Businesses run by sole traders must be sold as a going
concern by the people who administer your estate when you
die (often
referred to as the Personal Representatives, or PRs). If
you have made a valid Will they are also referred to as
Executors.
Your PRs are usually only granted a ‘reasonable period’ in
which to dispose of your business and having to sell in this
restricted time period may not be in the best interests of
your dependents. This ‘reasonable period’ usually
lasts for one year. You should have a Will drawn up appointing
responsible Executors and give them an express power to
continue the business for however long is necessary to
avoid a forced
sale.
In your Will you should also give your Executors the power
to use other assets in your estate to support the business.
If they are not given this express power they can only
use assets which comprised the business at the time of
your death.
Partnerships
Where a partner dies the PRs do not usually have the power
to become involved in the management of the business.
Typically they are empowered only to arrange the sale of
the deceased
partner’s interest in the business.
It is critical therefore to ensure you plan ahead and
take legal advice during your lifetime. A partnership
agreement
should be drawn up to provide for the business to continue
after the death of one of the partners, often with an
option for the surviving partners to buy the deceased’s share.
If there is no formal partnership agreement then the business
will automatically be dissolved.
We can advise you if you are unsure about what your partnership
agreement says, or if you would like one drawn up.
Limited companies
If you own shares in a private limited company, the business
will automatically continue after your death. However,
there may be real difficulties if a major shareholder
dies. The
survival of the business will depend on who manages
the company.
Your
PRs will need to consider whether the company’s articles
of association provide any other shareholders with pre-emption
rights or an option to purchase your shares. It is possible
for the company to buy back the shares, subject to certain
legal formalities. It is important from an Inheritance Tax
perspective that the other shareholders are given an option
and not an automatic right to buy the shares from your estate,
since you could be at risk of losing valuable Inheritance Tax
(IHT) relief.
What is clear is
that the business owner needs to think carefully about what
provision to make for the continuation of the business
after his or her death. In your Will you can appoint business
trustees specifically to manage your business affairs. Even
if you do not anticipate the business continuing for long – or
you simply wish to gift your interest in it outright to your
spouse or children – the sale proceeds of the business
can be adversely affected if not managed correctly when you
die.
Inheritance tax and business property relief
IHT is levied at a flat rate of 40% on the value of an
estate, less certain exemptions. The most important of
these exemptions
is a tax-free allowance of £275,000 (known as the 'Nil
Rate Band'). A taxable estate typically includes the value
of the family home. An estate is liable for tax on assets owned
worldwide if the deceased was UK domiciled or deemed domiciled.
Business Property Relief is an important IHT relief which
is aimed at reducing the value of ‘relevant business property’ transferred
on death or on an earlier transfer. Relief can be available
at 100% of the value transferred on certain business assets.
Relief at the lower rate of 50% can be available on assets
owned personally and which were used wholly or mainly for the
purposes of running a business. Typically, relevant business
assets must have been owned by the transferor for at least
two years prior to the transfer. The business must not be one
dealing in securities, stocks, shares or buildings: property
investment or letting businesses are generally excluded from
BPR relief. However, relief can now be obtained in certain
circumstances on furnished holiday lettings.
On the whole it is true that present tax legislation can
treat business assets very well. However, do bear in mind
the rules
that determine what relevant business assets are.
Call 01926 880722 for more information.
Michael
Osborne of Wright
Hassle Solicitors
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