We know that for business owners, large or small, there are many considerations to factor into daily life and sometimes things can get pushed to one side and ‘left for later.’ However, will writing and inheritance tax planning is something that anyone with their own business (or involvement in a business) should be focused on from the start – the death of a business owner, or a partner, can seriously impact on the business itself if no provision is made. Different entities are affected differently, whether you’re a sole trader, a partner or involved in a limited company.
Sole traders
How does the business survive? It often doesn’t. On the death of a sole trader, that person’s personal representatives (executors named in the will or relatives entitled to be personal representatives under intestacy rules) would take over the business, which is normally then sold as a going concern.
What to consider: where there is a will that involves beneficiaries with competing interests – or if intestacy creates that situation – then this may result in pressure to sell the business. A fast sale may not necessarily guarantee the best results.
Planning: making a will is key for a sole trader as this document can be used to set out, not just what should happen to assets but what should happen to the business too. For example, it is possible to specify that the business be carried on, avoiding a situation where there is pressure for a fast sale by beneficiaries. If necessary, the will might state how the business is to be funded – for example, using other assets in the estate.
Partners
How does the business survive? If there is no partnership agreement in place then it may not survive at all. The death of one partner can mean the automatic dissolution of a partnership.
What to consider: partners in a business who want that business to survive after their death need to focus on lifetime succession planning in advance.
Planning: a partnership agreement is a crucial document for ensuring the survival of a business based on partnership. This can protect the partnership share of the deceased from that individual’s personal representatives and be drafted so as to avoid an agreement to sell in the event of death (which could have negative inheritance tax consequences).
Limited company
How does the business survive? In most cases a limited company will continue to exist in the event of a death, depending on the role held by the deceased.
What to consider: shares are assets that are subject to inheritance tax unless business property relief applies.
Planning: there are many factors to consider for those involved in a limited company business, depending on the position held (director, shareholder etc) and the size and nature of the company. In particular, the question of what happens to the shares of the deceased.
Business Property Relief
Business property relief (BPR) is a consideration for anyone with a business interest as it provides relief against inheritance tax that arises when an interest is transferred. In order for BPR to apply the interest (shares, partnership interest etc) must have been held for at least two years in an entity that is not publicly traded.
For more information on any of the above – or for help with tax planning for business affairs – contact a member of our team on 0333 344 4772 or complete our online enquiry form.