10 areas owners of SMEs should consider when planning for the future

Cash flow, customers and business development may be typical concerns for most business owners during the working day (and beyond), but death, or rather the affect it can have on the business, may not always feature highly on the business planning agenda. The death of a business owner can potentially have a major impact on the continuation of the business, so it’s surprising that a high number of business owners fail to make plans for the future should they pass away. Here are 10 areas that should be considered:

Make a Will - Business succession planning really ought to start by making a Will. A Will sets out your wishes in respect of the business and can help to provide flexibility in terms dealing with the business after your death. 

Choose your executors and trustees wisely - You need to appoint one or two trusted individuals who you know will make decisions in the best interests of your business.

Sole trader? - If you are 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.

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.

In a partnership? - Make a partnership agreement now. 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. 

Think about inheritance tax - 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. 

Financial planning will pay off - There should be adequate reserves and insurance to allow your partners or successors to buy your share of the business from your heirs. There should also be enough insurance or funding to maintain the business.

Make the most of property relief - There are generous tax relief available for business property. 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. 

Consider a trust - Businesses can qualify for an exemption to inheritance tax, the benefit of which is lost if assets pass to the surviving spouse outright. It may be more tax efficient in the long run to leave the business interests in 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.

Update your Will regularly - Any major changes to your circumstances should lead to updating your Will – this includes marriage, divorce, buying/selling property. 

Don’t put off future planning - Now is the time to plan for the future. 

Our specialist solicitors can assist you on the most suitable business structure to ensure your business is best placed to deal with such circumstances at a difficult time.