With the many pressures facing family and owner managed businesses, planning for the death of a business owner is often neglected. Succession planning should, however, form a key part of your business strategy and the preparation of a well thought out Will is key.
Business owners should identify assets within the business and how these are owned. This may seem obvious; however, there may be reasons why a property is owned by the business owners rather than the business itself. If this were the case, a gift of the business owner’s share in the business would not include their interest in any property which is used by the business but owned separately. The property would then pass to the residuary beneficiaries, which would be far from ideal and may create continuity problems for the business.
There may also be a tax implication of owning assets outside of the business as these will generally qualify for a lower rate of Inheritance Tax Business Property Relief on the death of the owner. It is important to assess this when calculating overall exposure to consider if steps can be taken to mitigate the liability during the owner’s lifetime.
It is also worthwhile considering who you want to benefit from your business as there could be competing interests of family members, particularly those who have taken a more active role than others. This could be avoided with a considered approach to succession planning, which addresses how the business is to pass on death and to whom.
There may also be a tax consideration when deciding who to leave the business assets to. When leaving assets to a spouse this will ensure that such assets pass free of Inheritance Tax, however, the generous Business Property Relief that may be available to business owners on death is lost.
A properly drafted Will can provide for all assets qualifying for Business Property Relief to pass, for example, into a discretionary trust or to chargeable beneficiaries such as the business owner’s children taking advantage of this generous relief at the earliest stage.
Another succession planning step which may be just as effective as a Will is a cross-option agreement. This helps to ensure that a shareholder’s family benefit from and inherit the value in the business. It can often be difficult for small to medium sized businesses to raise sufficient capital to ‘buy out’ a deceased shareholder. A cross-option agreement backed by life insurance can mean that funds are available immediately to buy out the deceased’s shares. If structured properly, it can also ensure that the shares qualify for Business Property Relief with the proceeds of the life policy falling outside the estate and not subject to Inheritance Tax.
Succession planning involves a number of different factors and should always be undertaken in good time and in consultation with your lawyer, accountant and financial adviser to ensure the best result for the business and your family.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.