Are you prepared

by Emma Williams

An essential part of running a business is negotiating and dealing with the challenges that arise along the way. One obstacle impossible to avoid is your own death, yet it is all too often overlooked by business owners. Efficient succession planning, however, can ensure that your business continues to run smoothly after your day and can be sold or inherited in the manner you intended.

Making a Will...and getting it right

Approximately two thirds of people die without making a Will (intestate), yet many are unaware of what actually happens to their assets as a consequence. The rules of intestacy apply in such cases and strictly govern the amounts which go to the surviving spouse and any children. For example, where there is a surviving spouse and children, the spouse will inherit up to £125,000 and all personal possessions (which does not include items used in a business). The remainder of the estate is split into two halves with 50% going to the children in equal shares while the spouse gets a life interest, but does not own, the other 50%. Eventually that 50% will go to the children also.
Unmarried couples do not benefit from each other’s estate under the intestacy rules regardless of the length of time they have been together. One option available to the surviving partner is to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975 for reasonable financial provision. However, this is a cumbersome and expensive process that could be easily avoided by making a Will to include the survivor.

Executors are the people appointed by a Will to collect in and distribute the assets of an estate according to the terms of the Will. In some cases the task involves merely the closure of a few accounts.  Where an estate includes business interests, however, this usually involves substantially more work, for example approving or disapproving creditors’ claims, managing the business and calculating the Inheritance tax due. It is essential to appoint people that you trust and is wise to choose those who have some business acumen.  Of course, it is always possible to appoint a professional person to act as an executor or for the executors, after the death, to instruct a firm of solicitors to carry out the work.

Once you have chosen your executors it is crucial that they are given the necessary powers to deal with your estate correctly. There are statutory rules in place. The power to continue the business of a deceased person is not, however, provided for by statute. If a person dies intestate or leaves a Will which does not provide the executors expressly with the power to continue the business then they can only do so with a view to it being sold, and the sale must generally take place within a year of the executors’ duties arising. The Will should, therefore, include powers which enable the executors to run and manage the business for as long as is necessary.
Obviously the rules governing what you can do with your business depend largely upon the form that the business takes. A sole trader may, for example, consider passing on the business to one of his or her employees or a family member and a well drafted Will could include terms such as an option for that person to purchase the business.
A partnership is often governed by a partnership deed, which is a legally binding agreement made by the partners as to how the business is to be run.  The terms of such an agreement will supersede any conflicting clauses in your Will. If there is no agreement in place then the business is governed by the rules laid down in the Partnership Act 1890.

Without a partnership agreement, on your death the partnership is automatically dissolved and the business is wound up with your share of the income and capital passing to your estate. This does not prevent the other partner/s from continuing the business but they may well have to sell assets in order to pay out your share to your estate. On the other hand your estate would be jointly and severally liable for the outstanding debts of the partnership if the liabilities of the business exceeded the assets. It is therefore worthwhile considering taking out insurance to provide for the event of having to pay out on a partner’s death, having an agreement in place to determine what is to happen to the partnership and making a will to gift your interest in the business.

A limited company is a separate legal entity from those who run it and the rights of the share holders are encompassed by the company’s articles of association. You should consult the articles as to whether there are any restrictions on the transfer of shares as the articles would supersede any conflicting clauses in your Will.

Business Property Relief

Making a Will can sometimes avoid an unnecessary Inheritance tax bill on death. For many people with business assets business property relief is available which reduces the value of that person’s estate for inheritance tax purposes. It is important, however, to make sure that the assets fall within the Inland Revenue’s criteria to be eligible for the relief.

Planning what will happen after your death may seem depressing, but avoiding the issue could be much more costly for your successors, be they your family or business partners, in the future.

Emma Williams is a trainee solicitor in Burnetts’ Wills and Trusts department. For further information on inheritance tax planning for business owners, contact Burnetts on 01228 552222.

Apr 08