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Around half the people in the UK do not have a will. Many who do, wrote it so long ago that it is out of date. So why am I still surprised by how many business owners have no plans for what happens if they suddenly die?
There are more than 5mn private businesses in the UK, with over a quarter employing staff — which makes this a serious issue that affects a huge number of people. Not planning properly could jeopardise the future of your business and ultimately cost your loved ones many thousands of pounds.
Businesses vary enormously, but some basic principles can be drawn.
The obvious starting point is: will the business survive without you? Be realistic. Even if you employ staff, if you are what Americans call the “rainmaker” — the one who brings in the money or the person around whom the goodwill has been built — the business could still die with you.
If you know the business will fold, you should have a clear plan in place for someone to wind it down and dispose of the assets, which may be substantial.
If you have partners, a capable staff or family, the business may still survive, continuing to generate income for loved ones or the possibility of a lump sum from a sale or manager buyout.
You may need to create an incentivisation plan to retain key staff, perhaps leaving them shares in the business. It is important that this plan is written into your will.
Crucially, your staff need to know what you intend to happen either before your death or immediately after it. The danger is that you have a close encounter with a number 9 bus and pandemonium sets in. Completing probate is likely to take longer than a year. Without a clear and early indication of a plan, the people most vital to the running of the business may become unsettled and move on — causing it to disintegrate.
To keep the business going, someone new may need to be employed to take your place. Good people are not cheap, and it may take time for them to settle in. So-called “key-man” risk insurance is worth considering, as it pays out a lump sum that can help cover unforeseen business costs arising from your death.
In truth, I find that many of my clients are irreplaceable in their businesses. Extra money is of no benefit, so the insurance is not worthwhile. But there are instances where it can be vital.
What about the family? It is common with many businesses that one adult child is interested in taking over, but their siblings are not. Do you force your interested child to sell the business, share the proceeds and start up again on their own?
There are a number of ways to address this. You could leave shares to all, with the non-active children remaining “sleeping shareholders” and taking a dividend. This may not please the child doing all the work and worrying!
If you can afford it, you may have to leave shares to the active sibling and compensate the others with other assets — potentially by loading some debt in the business to raise the cash. Whatever you decide, try to talk to your family to ensure there are no nasty shocks waiting for them.
In 1976, the UK government introduced business property relief (BPR) to help trading businesses continue after the death of their owners. Unlisted businesses owned for more than two years qualify for 100 per cent relief, which means they are effectively exempt from inheritance tax (IHT).
Inevitably, any relief as generous as this is open to abuse. To prevent this, there are some complex rules that mean the tax position on your business may not be as simple as you think. If you have committed to sell the business at the time of your death, then it will not qualify, which can cause problems if partners’ or shareholders’ agreements contain a buyout mechanism for deceased owners.
Assets not needed for future use in the business also may not qualify, which includes cash. Some people use their company like a money box, stashing hundreds of thousands there.
A friend who runs a successful consultancy company takes less than £100,000 a year because she is not prepared to pay 60 per cent tax by hitting that income stratum between £100,000 and £125,140. Here you lose £1 of your tax-free allowance (set at £12.570) for every £2 you earn, which is what pushes the marginal tax rate so high.
As she cuts her hours to glide into retirement, she plans on using the surplus to maintain her current level of income for longer. Meanwhile the cash will stay in the company. If she dies suddenly, HM Revenue & Customs might take the view that this cash is not required for the future running of the business and is therefore ineligible for BPR.
How you own any property used for your business will affect the tax position. Say you are the owner-manager of a pharmacy company. If the building is owned in the name of the company it should qualify for 100 per cent relief. But if you own the property personally, and rent it to the company, then it is likely to qualify for only 50 per cent relief, whether or not you charge a market rent for its use.
This is a poorer position to be in, but if the company were to fold the property would be protected from creditors.
Sometimes a number of partners in a business own the property privately. Make sure you have an agreement in place for what happens to your share in the property when you die. The default legal position is that where there is joint ownership of a property, the survivor or survivors take possession on death. This may not be what you — or your loved ones — expect.
In most cases, when someone dies they leave the assets to their spouse including their business. This transfer is generally exempt from IHT. If your business qualifies for BPR it may be worth passing assets to the next generation and making the most of this relief. Colleagues will also benefit from it if you leave the business to them. Be aware, too, that you can use BPR before your death to pass on assets — useful for starting the succession process early.
You need to plan, take advice and ensure you are clear on the BPR position of your assets. It could determine how you take income today and how you distribute the assets after you’ve gone. It could also have other knock-on effects, influencing plans for the rest of your estate. Being too busy working to think about dying is no excuse!
Clare Munro is a tax adviser at Weatherbys Private Bank
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