Adam Bernstein reports for HVP on the importance of planning for your business after you are gone.
Around 60% of the UK population does not have a will, including a third of those aged over 55. For a business owner, dying without making a will can have a devastating effect, not only on the family but on the business too.
Angharad Lynn, a solicitor in the Private Client team at law firm VWV, says that if you die without a will your estate will be passed on according to the intestacy rules, which changed in October 2014 when the Inheritance and Trustees Powers Act came into force.
She explained: “Under the new rules, if an individual dies leaving a spouse and children, the spouse will take the statutory legacy (currently £250,000) and the rest of the estate will be divided equally between the spouse and the children.” If there are no children, the spouse inherits the whole estate.
For unmarried couples, it is particularly important to have a will, as the intestacy rules take no account of such relationships. Lynn warns that, if there are children, they will inherit everything. If not, the estate will go to other blood relatives. The surviving partner will receive nothing.
It’s an executor who administers estates after death and, as Lynn says, although it’s quite normal to appoint a spouse or children, it’s worth considering appointing a professional who can ensure that business assets are dealt with as you would wish.
This can be an individual, such as your solicitor or accountant or, alternatively, many professional firms have a trustee company that can act as an executor. She adds that the advantage of this is that while your own lawyer or accountant may have retired (or died) by the time of your death, the trustee company will provide continuity for the appointment of executors, enabling partners from the firm to act. The retirement of your own lawyer will not mean that you need to update your will.
Tax planning after death will be a consideration and Lynn notes that one of the reliefs from inheritance tax is Business Property Relief (BPR), which 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 and shares in unquoted trading companies.
“BPR is currently awarded at 50% or 100%,” explained Lynn. “It’s a very generous relief and it is possible that its use will be curtailed in a future budget. So, when planning your succession, you should ensure the business will qualify for BPR by checking it meets the scheme requirements.”
To qualify, businesses must be trading but, if the proportion of assets held in investments is too high, the business may not be able to use BPR.
Trust your will
Business owners often want flexibility after death and, for this reason, it can be useful to leave business assets in a discretionary trust in the 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 will be in the future,” explained Lynn. She says that, 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.
If there are family members who are not involved in the business, Lynn says that a trust can help protect 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 skills or experience to be involved. Using a trust can protect against this.”
She adds that if you are including a trust in your will then you should also include a letter of wishes to give guidance to your trustees about how you envisage the trust being used after your death. She advises that 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.
Lynn’s last suggestion is to ensure that company documents, such as the articles of incorporation and shareholders’ agreement, accord with the wishes set out in your will.
She gives examples: “Some family businesses may only allow shares to be passed to direct descendants of the founder. A spouse or stepchildren would not be included in this case.
“If your will leaves company shares to your spouse but the company’s constitution does not allow this, the gift will fail. Alternatively, if the business is run as a partnership, in the absence of a partnership agreement, the Partnership Act 1890 will apply and on the death of a partner, the partnership is dissolved.” Here, a surviving partner would have to wind up the business.
It’s also possible to leave instructions in your letter of wishes about the sale of the business and who you think may buy it. You can address issues such as who will manage the day-to-day running of the company until the sale is completed, and who the preferred buyer might be.
Without a will, the wishes of the deceased will not be known, and the law will step in and determine how assets are distributed, most likely leaving survivors without what they expected.