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Wills For Businesses

Wills for Businesses - Is there business life after death?

George Bernard Shaw once 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 did not 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 during your lifetime will help. Much depends on the type of business you have and how it is set up in the first place.

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 for short). 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 it is possible that having to sell in this restricted time period is not in the best interests of your dependants.  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 as necessary. This will 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 and cannot draw on the rest of your estate to support or finance its continuation in any way.

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 that you plan ahead and take appropriate 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.

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 business’s survival 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. If not, the company’s articles can be altered to allow the company to purchase its own shares from your estate. 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 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 - it needs to be remembered that the sale proceeds of the business can be adversely affected if not managed correctly when you die. The best way to ensure your beneficiaries receive their entitlement is to see to the proper management of the business immediately after your death and the only way to ensure this is to plan ahead and make a Will.

Inheritance Tax and Business Property Relief

Inheritance Tax is levied at a flat rate 40% on the value of an estate, less certain exemptions.  The most important of these exemptions is a tax-free allowance of £325,000 (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 domiciled or deemed domiciled.

Business Property Relief (BPR for short) is an important Inheritance Tax 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 2 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.

Types of property on which business relief may be available include:-

  • a business.
  • an interest in a business, such as a partner.
  • unquoted shares which are not listed on a recognised stock exchange.
  • shares or securities which give the transferor control of a business.
  • land, buildings, plant or machinery used wholly or mainly in the business or partnership.

 

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Wills for Businesses - Institute of Professional Writers

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