A will is the ideal document for ensuring that your family wealth is distributed on your death to the right beneficiaries at the right time, for the right reasons. According to Unbiased.co.uk, a very high percentage of the under-55s haven’t got a will, and in 2016, only six in ten over-55s had a will in place. For businesses, the equivalent ‘business will’ ratio is even lower. This means that the death of the owner/major shareholder will have serious consequences for the family, other stakeholders, employees, and suppliers.
Why planning is important
Have you built your business from scratch? Nurtured it through tough times, working night and day? Gone to the ends of the earth, giving it your all until finally you have built something successful?
Your business is your baby and your life. You love everything about it. After years of effort, everything is now going well.
And then you die suddenly and unexpectedly before you can sort out your affairs. There was never enough time to do it.
Will your valuable business die with you?
Perhaps it is a family business. There will be a huge you-shaped hole in your family’s lives. Personally, financially, and professionally the business may continue (although do not underestimate the emotional turmoil such an event would have).
In this case, your personal will may be sufficient and include enough provisions (does it?). Now might be the ideal time to check with your solicitor and accountant.
But what if you are a sole trader, one of several partners, or a major/majority shareholder of a limited company?
associates, what you want to happen when you die? Here are a few things to consider:
- Do you want a smooth transition for investors, stakeholders, employees, and your family?
- Who do you want to sit in your seat and run the business?
- What do you want to happen about control and equality between your remaining business colleagues?
- What about the bank and creditors; will your business remain viable?
- Is there enough cash to repay debts and any personal guarantees?
- How will the transfer of ownership be funded?
- Where does HMRC come in; what are the tax considerations?
You may have a mirror will for your non-business personal circumstances – a simple arrangement that leaves everything to your spouse and then to your children in equal shares. If you are not married, you may have left everything to your children or other family members.
A common view is, “when I die the kids will get it all.” But what they get includes a share in your business. This may not be entirely helpful when it comes to paying the mortgage, school fees, or inheritance tax.
Your family and other beneficiaries may have no interest in, or aptitude to run your business. Fellow partners or shareholders may not want to deal with inexperienced family members. Your beneficiaries could even sell your holding to a competitor.
Family disputes surrounding personal inheritances are not uncommon – imagine the effect if a business is also involved. A dispute could severely affect the ability of the business to keep running day to day, and disputes could lead to bad press or loss of goodwill.
If you work in a partnership, in the absence of a well-documented Partnership Agreement the death of a partner means turning to the statute books. These state that a company is automatically dissolved on the death of a partner. Your company could die with you.
It is good practice to have a plan in place for your death which includes the correct financial and legal planning. You need a similar plan for your business.
There are four steps you can take
1.Ensure you have a business will in place. You can only have one legally valid will. If you are also a business owner, your will needs to include a separate legacy for the business assets and property. You may want to appoint different trustees who are better qualified to deal with your complex company affairs
2. Ensure there is a purchase agreement in place. What you and your family would probably like is for the remaining partners/shareholders to buy your share of the company. One approach is a ‘Buy and Sell’ option.
3. The company gets to continue running without outsiders being bought in, and your family gets compensated for your share of the company. However; how much is your share worth? Is its current value the same as what it could be worth in the future?
4. There needs to be a legal agreement in place for how your share is going to be bought and valued at the time.
Do you need any insurance? How is the business going to afford to buy your share and fully compensate your family? Some form of insurance may be required. Great care needs to be taken here to avoid capital gains tax. Take professional advice.
What documentation do you need to ensure assets pass tax efficiently? Many small and unquoted businesses could qualify 100% for inheritance tax relief (known as Business Relief). However, if there is a binding contract for sale in place at death, then this relief is lost.
It is important to ensure that any agreement and insurance contract is carefully arranged using a qualified financial planner and a solicitor. Use of business trusts can ensure that cash, once paid from the business, remains outside of your estate.
Lasting power of attorney
As for individuals, in addition to needing a will you also need a Lasting Power of Attorney to cover what happens to your company if you are incapacitated.
This would dictate who would be responsible for making decisions if you had lost capacity and could no longer be called upon to run or work in the business. You will still be alive, so the steps above would not come into play.
Losing capacity to make decisions could be an event where a Partnership Agreement becomes void. It will be difficult for a business to operate if you play a key role.
For more information on Lasting powers of attorney read this blog.
Where do you start?
The first step is for you, the business owner, to take time out to mull over what you want to happen if you die before you exit the business. Think things over, chew the fat.
When you have a good idea of the best outcomes, share your thoughts with your family. Once you are clear, raise the topic with your business colleagues and get them on board.
You are then ready to bring in a team of professionals to help you execute the identified actions. The team should include:
- A solicitor who specialises in companies and business transactions. There are bound to be a host of legal complexities, forms, and documents to read, understand, and sign.
- An accountant who has similar specialism and can look through the taxation lens. There are a range of taxes which will affect various decisions and outcomes.
- A financial planner who can coordinate the team and identify aims and objectives for the right outcomes. The planner should also be able to facilitate any insurance or critical illness insurance policies that are needed.
None of these functions will happen overnight, and the process will take weeks if not months to conclude. Medical underwriting for insurance could be prolonged.
It makes sense to have your business independently valued. It is also sensible for all concerned parties to have their own family discussions to ensure that everybody understands the consequences and obligations, the pros and the cons.
If you are in business and want to discuss any of these topics, contact Capital to speak to one of our chartered financial planners.
Please note that nothing in this blog represents legal advice, and you should always seek professional guidance before acting. Financial Conduct Authority does not regulate tax advice, Trusts or Wills.