It’s a good idea to plan for the future or consider how your family business would continue after your death. It’s beneficial and relatively simple to plan for the future so that your business thrives even when you are gone.
You can also benefit from tax savings by incorporating Business Property Relief (up to 100%) into your Will. The type of family business you have will determine how your business is transferred.
If you are a sole trader, it may seem the business ‘dies with’ you as you are the owner. However, if a talented novice in your family exists, you might choose to ensure that the business assets and family business pass to them through your Will. You must ensure that the people you gift the business can perform the job. However, they might not have the skills or expertise necessary to move the company forward. This is the easiest way to leave a business in your will, as it has no restrictions.
Although partnerships can be beneficial for Business Property Relief (BPR), they are not able to provide any partnership agreement. Any partnership will disintegrate upon the death or incapacity of one of its partners. It is important that the partnership agreement covers the partner’s death and includes provisions about how the share will be passed to their family members. If a partner does not want to be involved in the family business, shares can be valued to enable family members to get the share. Or they may keep the shares and continue participating in the daily operations. The shareholders’ agreement usually details the rights and obligations of limited companies. The shareholders should carefully read these agreements, as many contain clauses that your interest in the shares will cease upon your death. This could lead to your executors selling your shares to other shareholders. This would result in cash being paid to your estate. However, this will not qualify you for Business Property Relief and thus subject to inheritance tax. It is important to avoid gifting shares to a limited company. This could alter control and allow a beneficiary or family member to take over majority control, leading to problems with other shareholders.
You should think about your family and beneficiaries. How will the rest of your family feel if you leave shares or the business to one family member involved in the business during your lifetime? To ensure a fair division of assets after your death, it is beneficial to have your business valued. Those not involved can receive an equal share of your estate assets.
Leaving your family business to a spouse/civil partner?
It is not wise to leave a family business to your spouse or civil partner. Any inheritance made by spouses or civil partners is exempt from Inheritance Tax (IHT) and is potentially a waste of the BPR. We can help you decide how to leave your business to your family so that it still provides income for your spouse or civil partner but also protects the BPR for future generations.
If you want to maximise BPR, it is important not to keep excess cash in your business. It may be better to withdraw the excess cash and do things that minimise IHT. We can also help you with that.
BPR applies to go businesses that are not subject to selling. Let’s go back to the public policy purpose of the relief. If partners make it mandatory to purchase a deceased partner’s share upon death, you may need to do so. If that is your goal, it is crucial to ensure that shareholder or partnership agreements are written in a way that preserves BPR.
It is important to have these agreements in place to address other issues, such as disputes between shareholders or partners and realising value within the business. Our corporate specialists are passionate about these arrangements and can help you realise your business goals.
You should consider many things when leaving your family business behind. Our experienced Wills team can help you to make a Will, which can ensure your estate is split as you wish, in the best way for you and your loved ones, on your passing.
You can contact us today to speak with one of our corporate specialist partners to ensure you have the best plan to protect your business and your family.
Ross Whatnall is CEO and co-founder of GSB and a highly experienced private client director. Ross holds many insurance and investment management qualifications, including CISI, CII, LIBF and CFA. He started his career in private banking with HSBC in the UK before moving to the UAE in 2013 to focus on serving his private clients.