Succession

If you own a business or are a partner or a shareholder in a business it is important to consider what will happen to that business after your death. This includes inter alia:
Shareholders’ Agreements (perhaps giving business partners or co-shareholders or family first refusal to purchase your shares),
Cross Option Agreements (giving business partners or co-shareholders first refusal to purchase your shares), and
Key Man Insurance (paying a lump sum to enable business partners / co-shareholders to purchase your interests).

If you are the sole proprietor of business, will it continue after your death and, if so, will your family have the skills to continue it?

Inheritance Tax (“IHT”)

Some business assets are not liable to IHT on death (or transfer during life). The main IHT relief is on:
• Sole trader businesses
• An interest in a business (such as a partner)
• Unquoted shares and shares traded on the Unlisted Share Market (“USM”) or the Alternative Share Market (“AIM”)
• Unlisted securities which (perhaps in conjunction with other unquoted shares or securities) give the owner control of the company.

This relief, known as Business Property Relief (“BPR”), is at 100% of the value of the property or business and the property or business must have been owned for at least two years continuously prior to death (or transfer during life).

BPR is limited to 50% on:
• Listed shares which themselves or with other listed shares or securities give control of the company
• Land, buildings, plant and machinery used wholly or mainly in the business or partnership or company.


BPR is not available if:
• The company or business is wholly or mainly engaged in dealing with securities, stocks or shares, land or buildings, or in making or holding of investments
• The business is not carried out for gain
• The business (or shares in the company) is subject to a contract for sale.

BPR is a complicated aspect of IHT and the above is only a brief and incomplete resume of the subject.

Similar provisions apply to Agricultural Property.

Wills

Subject to any shareholder/cross option agreements your Will should give your Trustees (Executors) powers to carry on the running of the business on behalf of your family (without owning the financial interest you are leaving for the benefit of your family), making day-to-day and one-off decisions (such as selling the business) with suitable indemnities. So the choice of Trustees is very important (and could include business partners, co-shareholders, or accountants or solicitors with suitable business experience).

Having ascertained that BPR is available for a business asset, the next step is to make best use of the relief. If such an asset is left to a spouse or civil partner then the effect is that the BPR has been wasted, because any transfer to a spouse or civil partner is fully exempt from IHT (ignoring foreign domicile issues). So the best way of dealing with business assets may be to leave them to a discretionary trust in your will.

In your will you set up a discretionary trust with the trustees consisting of adult family members and perhaps also any business partner(s). The beneficiaries of the trust will be the people you want to benefit from the business asset (usually spouse/civil partner and children/grandchildren). The terms of the trust will allow the trustees to pass on income from the asset to the beneficiaries and to sell the asset and then pass on or lend the proceeds to the beneficiaries (you can write a memorandum of wishes to the trustees setting out how you would like the trustees to treat the beneficiaries, but this is not legally binding on the trustees). The benefit of this for the surviving spouse/civil partner is that they need only draw down income or capital from the proceeds of any sale as and when they need it (or indeed borrow the money from the trust and not worry about repaying it - with the consent of the trustees, who are usually other family members). This means that on the death of the surviving spouse/civil partner any cash still in the trust does not form part of their estate and so is not subject to IHT.

For advice on the IHT and Will aspects of business succession contact The Moneta Partnership Ltd by any of the means below:

Email: info@monetapartnership.com
Website: www.monetapartnership.com
Freephone: 0800 7813487