Business succession planning

Important things to know

If you own a house, have cash savings, a life insurance policy and both valuable and sentimental personal possessions, you may have already considered what will happen to them in the event of your death.

While it is highly important to consider how you want your estate to be inherited amongst your family and loved ones and to write up your exact wishes in a will, it is also crucial that you think about what will happen to your business or company shares when pass away or if you ever become unable to make decisions due to old age, an accident or an illness, as it is likely going to be one of your most valuable assets.

To help you, this guide provides a definition of business succession planning and Business Property Relief (BPR), and includes important legal aspects you’ll need to consider as well as the best ways of protecting your business with a legal will and lasting power of attorney (LPA).

 

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What is business succession planning?

If you own a business, whether it’s small or large, you will need to consider what you want to happen to the company and any of your business shares, both when you retire and when you pass away. This is referred to as business succession planning and is a very important part of estate planning - particularly if you own an organization that continues to gain revenue, you don’t want to simply sell the business or you don’t want the business to fail when you’re no longer there.

If you do not have any dependents or family members, you might wish to sell the company, either to a business partner, director or senior manager who helps to run and manage the company.

If you do have children who are responsible and have knowledge of business, commerce and/or economics, you may wish for them to take over the business to ensure it continues to be successful.

Whatever you decide, you will need to put plans in place to make sure that the right people (or person) take over and lead your business when you’re no longer able to.

What is business property relief? - Inheritance tax on a family business

BPR is a type of tax relief that enables a business owner to claim back any inheritance tax (IHT) owed on any business-related assets and shares.

When you pass away, inheritance tax will be owed on your estate if it is worth more than £325,000 (40% tax will be payable on anything over this amount). If you own a business (as well as a house, personal possessions, etc) then you may be entitled to relief from IHT - known as Business Property Relief (BPR).

A business owner is eligible to receive BPR providing that they have owned the organisation (or the company’s assets) for a minimum of two years prior to their death. In the event that he or she dies not long after being in ownership of the business or asset, they will, unfortunately, not be entitled to BPR.

There is one exception, however, which is that in the event you inherit the business from your spouse but they owned it for less than two years, the period of time in which they did own it will be added to the amount of time you have owned it for (since inheriting it). So, if the total is more than two years, you will be able to get BPR.

Read more: Leaving a Business in Your Will

 

Important things to know about business succession planning

Transferring a business or company shares has its complexities, so it’s important to be aware of the following to ensure your business and/or your loved ones do not face further hardship when you pass away.

  • If the organisation’s documents state that the business owner’s executor, or executors, (also known as personal representatives) have the duty of selling your business shares to the current business partners or shareholders in the event of your death, your estate will not be eligible for Business Property Relief (BPR).
  • If you decide to pass on your business shares (or share) to your spouse or civil partner and after inheriting the shares, they sell them at a later date, the amount he or she sells it for will become part of their estate for inheritance tax purposes (and may be exposed to someone else if your partner remarries). It may also be at risk of being subject to other fees, such as those relating to care costs or creditors.
  • If your business partner’s mental capacity becomes affected (meaning they become unable to make decisions for themselves due to an illness, accident or age, for example), it is not possible to remove them from the business or stop them from inheriting shares - even if there are documents belonging to the company that state they can be removed. UK law now prevents this from happening.

To avoid any potential problems that could arise from the above, there are two ways in which you can protect your business in the event that you pass away or lose mental capacity.

1. Leaving your business or company shares in a will

If you want to ensure that your estate (assets such as your house, cash savings, possessions, business assets, etc) is inherited by your loved ones (beneficiaries) and you have specific requests as to how you want it shared out amongst them, it is really important to write a will that clearly explains these wishes to prevent your assets from falling into the wrong hands (without a will, your estate will be distributed according to the UK’s intestacy rules).

How you pass on your business or business shares will firstly depend on what type of business you own:

  • Sole trader
  • Partnership
  • Limited company (Ltd)

You will need to decide if you want your beneficiaries to inherit any business assets (to have some form of income) or if you want them to run the business on your behalf when you’re no longer able to. You will need to carefully consider whether or not they have the right experience, skills and character for your company to do this.

You might also want to consider setting up a discretionary trust which holds a part or all of your business until you die, where it will then be passed on to your chosen beneficiary stated in the trust.

To find out more about the above, take a look at our guide: Leaving a Business in Your Will

Setting up business LPAs (lasting power of attorney)

By setting up a lasting power of attorney (LPA), you are protected in the event that you lose mental capacity due to a medical condition, after having an accident or because it has come naturally with age.

An LPA lets you state exactly who you wish to take care of your affairs (financial or general care) if you ever become unable to make decisions yourself.

If you do not have an LPA in place and you unexpectedly lose the ability to think for yourself, someone will have to arrange a Deputyship Order with the Court, which will enable them to act on your behalf. 

This, however, may not be the person you wish to handle your personal affairs and they may not know how to handle them in the way that you’d prefer. It can also be a very expensive and long process if there is no LPA, taking as long as 6 months depending on the situation, meaning that during this time, nobody is legally able to make decisions for you.

What about joint accounts?

Joint bank accounts and business accounts (even those jointly held with business partners) are likely to be frozen during the time it takes to apply for a Deputyship Order, meaning that your business could be significantly impacted - even fail - if there is no access to the bank account.

Business LPAs

You can set up a business LPA which enables a trusted person to take over all or some responsibilities of managing the business affairs (bank accounts, employees, tax, etc) if ever the time should come that you’re unable to make decisions - this should preferably be someone who understands how your company operates.

If you only delegate some responsibility to someone, you will need to make sure that the company can continue as normal in the other areas you have not permitted them to handle.

All decisions made must abide by the Mental Health (Discrimination) Act 2013 - the Companies Regulations 2008 has since been amended, so you must adhere to the former-mentioned act.

Can I choose the same person for both my personal and business LPA?

According to UK law, yes - you can choose the same attorney for your personal LPA and your business LPA. However, it is highly advised that you do not do this as it is likely to be too much for one person to handle and in most cases, it is pretty impossible for one person to be responsible for the management of your business as well as your own personal affairs on your behalf.

You might like: What Happens to Your Digital Assets When You Die?

Protect your business today with Wills.Services

As you can see, there are many things to consider when preparing for death and protecting your hard-earned assets, and while it may seem daunting and may be a difficult, potentially upsetting thing to so, it is important that you do this part of your succession planning - particularly if you want your business to continue running successfully when you are no longer able to manage it yourself.

To get started with making a legally-binding will or setting up a lasting power of attorney, tap the button below to register for free with us at Wills.Services and get peace of mind knowing that your estate, including your business, is protected should the worst happen to you.

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Article reviewed 5th March 2021