Business owners without a Will are not alone. Around 60% of the UK population does not have a Will, including a third of those aged over 55 years. For a business owner, dying without making a Will and/or planning your succession can have a devastating effect, not only on your family, but on your business too.
If you die without a Will your estate will be passed on according to the intestacy rules. The laws relating to intestacy changed in October 2014, when the Inheritance and Trustees Powers Act came into force. 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. If the couple have children, they will inherit everything. If not, the estate will go to other blood relatives. The surviving unmarried partner will receive nothing.
Choosing an executor who understands
It's an executor who will administer your estate after your death. Although it is usual to have two or three executors, there is no limit on the number you can name in your Will. However, the maximum number of people who can take the grant of probate is four.
It is quite normal to appoint a spouse or children as executors; it is also worth appointing a professional who can ensure that your business assets are dealt with as you would wish. This can be an individual, such as your solicitor or accountant. Alternatively, many professional firms have a trustee company that can act as an executor. The advantage of this is that your own lawyer or accountant may have retired (or died) by the time of your death, and in this event, 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.
Plan to save on inheritance tax
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%—it is a very generous relief and it is possible that its use will be curtailed in a future budget.
When planning your succession, ensure your business will qualify for BPR by checking it meets the scheme requirements. Businesses must be trading to qualify, and if the proportion of assets held in investments is too high, the business may not qualify. Simply put, if the business owns ‘excepted assets’, that is, assets owned by a trading business but not used in the business (investment property for example), the value of these will be deducted from the value of the business and they will not benefit from the relief from inheritance tax.
Use trusts for flexibility
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 very 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. After the 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, depending on who is most involved in the business.
If there is any doubt whether the business assets will qualify for BPR, or if the business owner is concerned that BPR may be curtailed, a trust that has as potential beneficiaries both exempt (the spouse) and non-exempt (the children) can be useful. On the death of the business owner, the beneficiaries can ascertain whether the business assets will qualify for BPR. If it does apply, then under section 144 of the Inheritance Tax Act (1984) the trustees may decide to transfer the assets out to the children and wind up the trust. No inheritance tax will be payable. If the shares do not qualify for BPR, the assets could be transferred out to the spouse, again ensuring that no inheritance tax is payable (thanks to the spouse exemption). Provided this is done within two years of the death of the business owner, these steps can be ‘read back’ into the will so that it is as if the deceased had left the assets in this way for inheritance tax and capital gains tax purposes.
Further, if there are family members who are not involved in the business, the use of 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 means the beneficiaries would not have a direct right to any interest in the business and therefore no direct influence.
Draft a letter of wishes
If you decide to include a trust in your Will, it is important to also include a letter of wishes to be stored with your Will, giving guidance to your trustees about how you envisage the trust being used after your death.
A letter of wishes is not legally binding, and it is important to state that you do not intend to fetter the discretion of the trustees. However, the letter can explain to your trustees how you see the capital and income of the trust fund being used after your death. For example, you may prefer any income distributions to your children to be dependent on whether a child is involved in the day-to-day running of the business.
You may wish to give the trustees some criteria for paying income, or indeed capital. In the absence of any guidance (which should primarily be about the types of issue trustees might consider, such as housing need, financial circumstances), the trustees would probably feel obliged to treat the beneficiaries equally.
Review business documentation
Ensure that company documents, such as the articles of incorporation and shareholders' agreement, accord with the wishes set out in your Will.
For example, 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.
Ensure your business has the correct documentation in place. Take a partnership, for example. In the absence of a partnership agreement, the provisions of the Partnership Act (1890) apply. Under this act, on the death of a partner, the partnership is dissolved. This could leave a surviving partner in a very difficult position. They would have to wind up the business, completing unfinished work already taken on, paying the debts of the partnership, and distributing whatever is left.
It is also important to ensure that your business documentation does not prevent your estate from benefitting from BPR. If company documentation includes a binding contract for sale whereby the deceased's shares must be sold to the surviving directors and partners, then BPR will not be available. A way around this is a ‘put and call’ option, giving each side the option to sell or buy, but without any obligation.
Assets that can be left by Will
Assets held jointly with your spouse can be owned in either of two ways. They can be owned as joint tenants, or tenants in common. This is true for all types of assets, from your family home to shares in your business. If an asset is owned as a joint tenancy, it will pass outside your Will, by the law of survivorship.
What this means is that if the shares in your business are held with your spouse as a joint tenancy, they will pass automatically to your spouse on your death and not by your Will, regardless of the provisions of the Will.
To finish
The vast majority of people do not have a will in place and when their business interests are considered, they are sending their family into dangerous territory should they die. Quite simply, the wishes of the deceased will not be known, and the law will step in to determine how assets are distributed. This often leave survivors with other than what they expected. Making a Will is therefore of the highest importance for all people, but especially so for business owners.