Dealing with a Business in Your Will: A Guide for Business Owners

If you are a business owner, then it is particularly important to have a carefully-considered Will in place. Therefore ensuring that your business passes to the right person when the time comes. We look at the considerations of dealing with a business in a Will.

Should something happen to you and you have not left a valid Will, consequently there is a risk that your business could collapse. Also disputes could arise between those left behind. By planning what you would like to happen, and dealing with a business in a Will, you can take steps to avoid this. As a result you help your loved ones to manage the business in the way that you would have wanted.

What to consider when drafting your Will as a business owner

You need to decide whether the person you would like to take over the running of your business has the necessary expertise to step in straightaway. It may be that they require training. You could start this now, but also put precautions in place so that someone else can help and advise initially. This is until they are ready to take on sole responsibility.

Also you need to decide whether you want your beneficiary to have control over the day to day decisions from the start. Depending on the size of your organisation and the impact of the decisions to be made.

If the business is a limited company with other directors, then they will take control. You may be able to leave your shares to your choice of beneficiary in your estate although this is not always the case. In some instances, the shareholders’ agreement may give other shareholders the right to block the passing of shares to your beneficiary or the right to purchase these from your estate.

The type of shares and the shareholders’ agreement determines whether the shareholders are entitled to a say in the decisions that are made. In addition it may state if they can veto certain decisions. A shareholders’ agreement takes precedence over a Will.

Choosing who to pass on your business to

Careful consideration is needed about who will receive your business. First and foremost they need to have both the ability to run the organisation and also want to take on the role. If you plan on leaving it to more than one individual, they should be able to work well together. Advance planning will allow you to help them progress into the roles they will assume in advance.

You will also need to consider what share to leave each individual. Leaving everyone an equal share means no-one has a majority interest. This in turn could be difficult if parties disagree. The business could be paralysed if a decision cannot be made.

Tax advice

It is recommended to look at the tax implications in respect of a business transfer. If shares are moved to a new owner during your lifetime, there may be Capital Gains Tax payable. After death, there may be some tax relief available, but Inheritance Tax may be payable.

Most business assets are subject to 100% Business Relief for Inheritance Tax purposes. Where an interest in a trading business has been held for more than two years those assets are IHT free if you pass away still owning the business. The fact that they are IHT free presents a planning opportunity, allowing you to make a gift of the business assets to a discretionary trust. This does not form part of the spouse’s estate for IHT purposes.

Using discretionary trusts provides greater flexibility to consider circumstances in the future. Allowing the spouse to carry out more IHT planning and they can buy the business assets using cash.  The cash in the discretionary trust is not part of the spouse’s estate for IHT. Also the business asset in the spouse’s name is IHT free, due to Business Relief “BR”.  You have immediately converted a taxable asset (cash) into one (business subject to BR) which is not taxable for IHT.

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