Do you have effective planning in place to secure the value in your business?

By Erica Thomson, partner – private client at Geldards LLP.

Did you know it’s often said family wealth only lasts three generations?

This is not surprising given that many business owners have yet to take steps to secure the long term future of the business or to make sure the value represented by their interest in it can be realised by their family in the event of their death.

When you are starting a business, planning for what happens to it after your lifetime or in the event of the death or ill health of one of your partners in the business is unlikely to be at the top of your list of priorities. Juggling business and family commitments may leave you short of time to plan for the future but this could mean you are risking the value which represents all the hard work you have put into the business and perhaps storing up an unnecessary inheritance tax bill.

With the benefit of expert advice, making suitable provision for what would happen to the business and the value of your interest in it in the event of the unexpected death of you or one of your business owners need not be painful, complicated or unduly expensive. Ensuring you have an appropriate form of Will in place which will work in harmony with shareholder provisions can protect the future running of the business, secure the value of your interest in it for those you wish to benefit and save a fortune in inheritance tax.

Relief from inheritance tax

As a business owner, you may be afforded valuable inheritance tax relief, known as Business Property Relief, if you and your business meet certain conditions. Very broadly speaking the business must be trading rather than holding cash or other assets as an investment, and you will need to have held your interest in it for at least two years and not have already made any binding contract to sell. Where the relief applies, essentially it will allow your interest in the business to pass on to your beneficiaries free of inheritance tax.

Even where the conditions for Business Property Relief are met, the relief is commonly wasted where married business owners have not made an appropriate form of Will. This happens because typically the value represented by the business is simply left to the business owner’s surviving spouse in the first instance (for example, where there are straightforward mirror image Wills in place). Gifts between spouses are exempt from inheritance tax but the value the surviving spouse inherits will increase the size of the estate which will be taxed on his or her subsequent death. By that time, the probability is that the value once represented by the deceased business owner’s shares will have been realised and turned into cash with no scope to claim Business Property Relief when that cash value is passed on to the children or other ultimate intended beneficiaries.

With appropriate Will planning, any relief from inheritance tax attaching to your interest in the business can be captured and the value ring fenced through the use of a trust in your Will, to provide for a spouse, partner or children, without that value actually becoming part of his or her estate. This can secure significant inheritance tax savings for your intended beneficiaries.

Transferring your business

An appropriately drawn up Will should ideally be made in conjunction with a review of company articles and any other shareholder provision. By ensuring appropriate provision is in place you and your business partners will be able to direct who should take over the running of the business and who should benefit from the value of a deceased business owner’s shares in the event of the unexpected death of any one of you.

Depending on your circumstances you may be concerned to ensure that a family member or other particular person would inherit your share and say in the running of your business but your intentions may be scuppered if the company documentation gives the other shareholders the right to buy up your shares from your estate. Conversely, you and your partners in the business may wish to ensure that in the event of the unexpected death of one shareholder the remaining shareholders would be able to get on with the running of the business free from any interference from family members of the deceased. This can be facilitated with a specially written insurance policy designed to pay out to the surviving shareholders to allow them to buy the shares from the deceased’s estate at an appropriate value, leaving the deceased shareholder’s family financially secure. Such “cross option arrangements” and supporting life insurance need to be carefully set up and structured in order to work in the way intended.

As you can see, there is a great deal for you to consider as a business owner to make sure that your personal and business planning works in harmony. However, with the correct advice and support you can ensure that you are putting steps in place today to ensure your business can prosper and protect the value of your interest in it for you and your family in the long terms.

Effective personal planning for business owners – Top Tips

  • Choose a lawyer or law firm with both company law and personal planning expertise on hand.
  • Expect your lawyers specialising in personal and company law to liaise with each other and with your other professional advisers such as your accountant and financial adviser – this ensures a joined up and effective approach to business and personal planning.
  • Seek advice on whether your interest in the business will qualify for Business Property Relief, and what if any steps you can take to improve the chance of it doing so.
  • Check if your current Will is drafted to capture any available Business Property Relief rather than potentially waste it.
  • Review with your lawyers the company articles and any other shareholder provision, consider whether there is a mechanism in place in conjunction with appropriate Will planning to secure the effective running of the business in the event of the unexpected death of one of the business owners and how the value of the deceased business owner’s share would in that case be realised.
  • Review the efficacy of any existing “cross option” arrangements and associated insurance policy or policies intended to give you first call on purchasing the shares of your business partner were he or she to die unexpectedly (a piecemeal approach to advice in this area often means the overall provision in place is ineffective).
  • Remember to take expert advice if you are considering selling or gifting shares in your business during your lifetime to consider tax planning issues and opportunities, and make informed choices.
  • Make a Lasting Power of Attorney and encourage your business partners to do likewise. Your chosen attorney would be able to take decisions on your behalf in the event of you unexpectedly losing capacity. This could help to ensure the smooth running of the business and avoid expensive difficulties and delays if instead there is no one with the authority to stand in your shoes as shareholder.

Should you require any further information, please do not hesitate to contact a member of Geldards’ private client team via 0115 983 3745.