For many, the prospect of making a Will to adequately provide for their family can seem a rather daunting task. However, when you are a business owner, the number of issues to be considered increases. With that in mind, why should business owners make a Will? Is it really that important?
Planning for the future
Succession planning is often at the forefront of a business owner’s mind to ensure that the business can carry on when they are no longer here. A Will should be part of that succession planning process. This should be reviewed on a regular basis in order to take account of changes in both personal circumstances and the development of the business.
The preparation of a Will for a business owner will involve more than just deciding who should inherit the value of the estate. It should consider how the value of the business can be retained and transferred to the intended beneficiaries.
Some business owners will wish to pass the business on to the next generation. On the other hand, some business owners see their business as an investment that will ultimately be sold, with the proceeds of sale to be passed on to the family. In view of that, a Will needs to take into account the individual objectives of the owners of the business concerned.
The death of a sole trader usually represents the death of the business. However, your business assets will pass to the executors of your Will as part of your estate. The executors require to attend to settling any debts or taxes for which your estate is liable and, in some cases, they may need to sell some of your business assets to do this.
Once payment of debts etc. has been made, the executors will then distribute any remaining property or assets (including any business assets or the sale proceeds from said assets) in accordance with the Will. If you have not left a Will, your estate will be distributed according to the rules of intestacy and some people who you would not wish to inherit, will inherit.
If you wish your business to carry on once you are gone, it is important to plan ahead.
If no Partnership Agreement exists between the partners of a partnership then the partnership is terminated on the death of any partner – this is as per the Partnership Act 1890.
If, however, it is desired that the partnership is to continue beyond the death of a partner, then a Partnership Agreement should be made. A Partnership Agreement usually provides the legal framework for what is to happen on death.
However, in the absence of a partnership agreement, what happens? Well, take a farming partnership for example. The father dies and leaves the farm (including the property) to his 3 sons, but nothing to his daughter. The idea behind this is to keep the farm in the family. The daughter then decides to claim what is known as Legal Rights.
Legal Rights allow a spouse and children to make a claim on the moveable estate of the deceased. The Legal Rights which can be claimed by a spouse are one-third of the deceased’s net moveable estate if the deceased left children or to one-half of it if the deceased left no children. The children are also collectively entitled to one-third of the deceased’s net moveable estate if the deceased left a spouse or to one-half if the deceased left no spouse. With that in mind, in our scenario, the farm would ultimately have to be sold to satisfy the daughter’s Legal Rights claim. This is because the partnership property is held by all the partners jointly and one of the consequences of this is that all heritable property belonging to the partnership becomes moveable in succession.
Business Property Relief
There are certain Inheritance Tax reliefs available which can mitigate the amount of Inheritance Tax your estate would require to pay on death. In addition to some of the more commonly used Inheritance Tax reliefs, one of the reliefs also available is “Business Property Relief” (BPR). This is available for a business or an interest in a business, as well as land, buildings, plant and machinery used for the purpose of the business.
Companies which qualify for BPR are companies that are quoted on the Alternative Investment Market (AIM) and carry out a qualifying trade. Unquoted, privately owned companies that are not listed on the main London Stock Exchange and carry out a qualifying trade also qualify.
Unlike gifts and trusts, which typically take up to seven years before they are fully exempt from Inheritance Tax, BPR-qualifying investments are Inheritance Tax exempt after just two years provided that the investments are still held at the time of death. If the investor was to die before the two-year qualifying period is completed, the shares can be passed on to a spouse or civil partner without having to reset the two-year qualifying period.
BPR planning does not affect the nil-rate band meaning that it can complement other Inheritance Tax planning measures.
Business owners often want flexibility. With that in mind, it can be useful to leave business assets in a discretionary trust in a Will, with the surviving spouse and children as potential beneficiaries of the trust.
These flexible arrangements allow decisions to be taken after death, rather than trying to predict at the time the Will is made what the situation may look like in the future. After death, the business interests can be kept in trust and income paid to the children or shares can be transferred out to the children in appropriate proportions.
A trust can help protect the business if there are family members not involved in the business. If uninvolved family members inherit shares directly they may want a say in the running of the business, even if they do not have the necessary experience to be involved.
If you are including a trust in your Will, a Letter of Wishes should be included to give guidance to trustees about how you envisage the trust being used after your death. The letter is not legally binding, but it can explain to your trustees how you see the capital and income of the trust fund being used after your death.
Lastly, it makes sense to ensure that company documents, such as the incorporation documents, articles of association and shareholders’ agreement accord with the wishes set out in your Will. Some family businesses may only allow shares to be passed to direct descendants of the founder. If your Will leaves company shares to your spouse but the company’s constitution does not allow this, then the constitution will take precedence.
Making a Will – the benefits
In addition to a Will allowing you to decide who you wish to inherit your estate upon death and to provide you with the comfort of knowing your affairs will be in order when you die, a properly prepared Will can grant additional powers to your executors so they can, for instance, continue to run the business, sell the business, collect monies owing to the business etc. For many, the protection of the value of the business is paramount.
Should you wish to discuss how having a Will in place could provide peace of mind when it comes to your business, please do not hesitate to contact a member of our Private Client team who would be pleased to assist.