In the event of the death of a sole trader, the Personal Representatives (PRs) of the estate would take over and ultimately sell the business as a going concern. The PRs will either be the executors named in the Will or, if there is no Will, the relations entitled to act as PRs under the intestacy rules.
Competing interests of beneficiaries under a Will or under the intestacy rules may result in the PRs having to sell the business as soon as possible, especially if there is mounting pressure from beneficiaries to ‘cash in’ the assets in the estate.
Business succession planning ought really to take into account a Will. A Will can provide the PRs with flexibility when dealing with the business in relation to any other assets there may be in the estate following death. For instance, a Will can specify that the business can be carried on by the PRs and that other assets in the estate can be used to help support the business until an eventual sale.
Lifetime succession planning in respect of partnerships can be crucial to ensure the surviving partners can effectively carry on with the business.
If there is no partnership agreement in place the partnership may simply dissolve on the death of a partner.
A partnership agreement can give the surviving partners the ability purchase a deceased partner’s share from the PRs of the estate.
The partnership agreement ought to be carefully drafted so as not to create a binding agreement to sell in the event of death, which could have adverse Inheritance Tax consequences.
Will planning & Inheritance Tax
Certain business interests qualify for Business Property Relief (BPR) from Inheritance Tax on death. For instance, a partnership interest in a trading company owned for two years before death ought to qualify for 100% relief such that the value of the interest is reduced to nil for inheritance tax purposes.
It is quite common in circumstances in which a person is married or in a civil partnership that they simply leave all of their estate to their surviving spouse or civil partner in the event of death. If the estate contains business interests this could be wasting the BPR however as assets passing to a spouse or civil partner are exempt from inheritance tax anyway.
It may be more tax efficient in the long run to leave the business interests into a trust as an alternative to all the estate passing outright to a surviving spouse or civil partner. The surviving spouse or civil partner can still benefit from the trust during their lifetime but without the underlying value of the trust fund then being included in their own estate in the event of their later death.
We can also advise on the most suitable business structures to ensure that a business is best placed to deal with such circumstances at a difficult time.
As a founding member of Certainty - National Will Register, we are now able to offer free registration to our clients.