What happens to my business when I die?

When you build your own business, you do so expecting to pass it down the generations or to sell and have a happy retirement. However, we see so many business owners fail to put in place the documents and arrangements needed to ensure that happens, whether that’s shareholder agreements, cross-option agreements, life insurance or Wills. It’s common to see the business owner get consumed by growing the business and overlooking what is needed to ensure there is something of value at the end.

Will planning for business assets will typically depend on the nature of the business assets and what is envisaged will happen on death. Certain businesses will qualify for business relief against inheritance tax, which can be 100% of the value of the asset.

Broadly speaking, if over half of the value of the business can be attributed to the normal trading activity of the business (and not the mere holding of investment assets) and the deceased has held the relevant shares for two years or more before their death, 100% relief can be claimable. When the business owner dies leaving a widow or widower, unless there has been specific planning in the deceased’s Will, the spousal exemption will apply and there will be no need to claim the relief. If however, the business is subsequently sold, the proceeds of sale (cash) will now be included in the widow or widower’s estate. The relief is not available on cash assets and so now, a once relievable asset will potentially be taxable at 40%.

Business Succession Planning: Wills and Trusts

If instead the business owner had utilised the relief by leaving the business asset to a discretionary trust on their death, any subsequent sale would see the proceeds of sale stay outside of the widow or widower’s estate and avoid the 40% inheritance tax regime. This can represent a significant saving.

It may be that continued ownership is preferable in a trust environment as the people making decisions (the trustees) can be chosen specifically according to their skillsets and ability to make sound commercial decisions. It is quite common for beneficiaries to not know much about the deceased’s business and them having to make decisions would affect its value and profitability going forward. Carefully selected trustees and a thorough letter of wishes/guidance could be pivotal in the business continuing to provide value for the family into the future.

Additionally, the surviving widow or widower, if their own funds permitted it, could purchase the asset back from the trust in the hope of benefitting from the relief again on their death; this is known as double dipping. Essentially, the trust would end up with the sale proceeds, and the surviving spouse would have successfully reduced the value of their estate (without needing to survive seven years) by making the purchase. They would then have a 100% relievable asset in their estate. On their death, the family benefits from having had the relief twice.

This is a highly complex area of the law and you will need specialist legal advice. Please get in touch with our team of expert Wealth Protection lawyers by telephoning 03333 058375, or email wealthprotection@psg-law.co.uk.