As a testator (someone who makes a legal will), alongside your family home, personal possessions (both valuable and sentimental), cash savings and other assets, one of the most important assets that you can leave behind to your children or other loved ones is a company or shares in the family business.
Determining who your company shares go to can be an overwhelming decision to make, but it’s an important one to ensure that the shares are given to the correct person/people and to make sure that your business carries on as normal without you.
How you leave a business in your will, as well as who you leave it to is dependent on numerous factors, including whether or not your estate is entitled to business property relief (BPR). Only if you’ve owned a business for at least two years will you be entitled to BPR, but anything less than this and you will not be able to benefit from this.
Business property relief is a form of tax relief and it enables you to claim inheritance tax (IHT) relief on any business assets or shares that you own (if the total value of your estate is over £325,000, there will be 40% inheritance tax charged on anything above that).
100% relief is for a business or an interest in business, as well as unlisted company shares.
You can get 50% business relief on land, buildings or machinery owned by the deceased if they were used in the business that they owned and controlled or were a partner in. 50% business relief is also offered on shares controlling more than 50% of the voting rights if the company is listed on a registered stock exchange.
If you gift your company or your business assets at any point in your life as a type of inheritance, but you pass away within the following 7 years after doing so, Business property relief is only available if the beneficiary maintained the business assets right up until your death.
It is also important to be aware of Capital Gains Tax (usually 10%) which is payable in the event that you gift or sell your shares during your lifetime - however, if you do not gift your business or business shares during your lifetime and instead, you pass them onto someone in the event of your death via a will, Capital Gains Tax will not apply.
When it comes to tax planning with regards to valuable assets and shares, it is highly recommended that you discuss your tax circumstances with an official solicitor or accountant and get professional wills advice before you make any final decisions, as you need to be aware of all aspects when leaving a will to protect your estate and assets, including your business.
The type of business that you have will also influence your decision on how to leave your business as inheritance and any shares in your will.
Below, we’ve listed a few of the most common types of businesses and what you should be aware of when leaving business assets in your will.
Leaving a sole trader business in your will is arguably the easiest as you’re the only person who owns the company and therefore, you have full control when it comes to deciding who to leave it to.
If you run the business alone and you want someone specific to inherit it in the event of your death, you need to think about how you want it to be run once you’re gone. It is a good idea to discuss your thoughts and expectations of what you want the business to look like with the person who you decide to leave it to.
If there is no legal partnership agreement in place, then the partnership will likely dissolve when one partner dies.
However, this isn’t exactly an ideal outcome and it is therefore important to have a ‘partnership at will’ policy in place so that each person knows what to expect when another person dies. This type of agreement will also provide options for the surviving partners if they wish to distribute the deceased partner’s shares.
A partnership at will agreement will also enable the deceased’s shares to be valued and distributed to their beneficiaries; whether that’s the actual shares or a cash payment if they would prefer not to receive shares.
Leaving shares in a limited company when you die is a little more complicated and involves a lot more careful thought and consideration.
Most limited companies should have documentation in place that includes details of what should happen to an individual’s shares in the event that they pass away.
In some cases, other shareholders may be given the option to purchase the deceased’s shares, but it’s important to check that the documentation doesn’t state that your interest in the business property ceases to exist should you pass away.
In this event, it means that your interest in the business would be purely monetary, rather than the business property, which would mean that business property relief (BPR) would not be available.
A discretionary trust allows you to put some or all of your business into a legal trust when you die, which can then be distributed out amongst any beneficiaries you choose.
This kind of trust allows your beneficiaires to decide what is best for the business when you die.
When choosing to leave a business in your will, there are many things you need to think about and consider and while it can be quite an overwhelming task to carry out, it’s a very important one as well - not only for yourself and your family members, but also for your business itself.
You’ll want to ensure that your business will be looked after long after you’re gone and making the right decisions about who to leave your business to is an important part of that if you want the business to carry on succeeding when you are no longer around.
For example, you may wish to leave your business to your children, but you must carefully consider if they have the right skills and experience to ensure it is managed the way you want it to be when you pass away. This is a highly important aspect to consider when making your will and you should make sure you are passing your assets on to someone you trust.
If you want to make a legally-binding will that protects your hard-earned estate, including your assets and business, tap the button below to register for free and to get started today.
At Will.Services, our legal experts will check over your will to ensure that it is legally-valid so that your loved ones such as your children won’t face any difficulties when the time comes to use it. If they come across any errors, they will be able to offer you professional wills advice on how to rectify them.
If you need more advice about wills, inheritance tax and would like to do more research regarding business wills, take a look at our guides online. You may also wish to set up a legal business LPA to protect yourself if you ever lose mental capacity due to age, an accident or illness.
Article reviewed 5th March 2021