Taking a closer look at Businesses and Wills
Posted on March 13th 2023
If you are in business, it is important that your intentions are made clear regarding what will happen to your business in the event of your death. If you do not have a Will in place then any of the following scenarios could apply:
- *Your business could pass in accordance with the intestacy rules and not to the people who you would like to benefit from it;
- *Your business may need to be sold;
- *There is the potential for disputes between family members or with those already running things as to who should continue the business after your death;
It is, therefore, strongly recommended that you put a Will in place. Below we discuss some of the key factors that need to be considered by employers and business owners when making a Will.
If you own a business and operate as a sole trader, then it may be that on your death you would like your business to simply cease and for your Executors to wind up your business, sell any equipment, discharge any liabilities (including tax) and realise the value of the business assets. This may be the case particularly where your business is solely dependent on a particular skill that you possess.
Alternatively, it is possible to leave your business to particular people who you would like to inherit the business in order for the business to continue trading after your death. It is important to have a Will in place stating who you would like to take on the role of Executor. It should be someone who you trust to be able to take responsibility for the business assets following your death and to distribute them to the people who you would like to benefit from your Estate in accordance with your Will.
If you own shares in a limited company, then it is particularly important to consider what would happen to your business on your death.
It may be appropriate to put in place a ‘cross option agreement’ for the sale and purchase of the shares, giving the remaining shareholders the first right of refusal to purchase your shares. It would be sensible to consider putting life insurance in place written in trust for the benefit of the remaining shareholders to ensure that they would be able to afford to purchase your shares. Ideally, this arrangement would be reciprocated for each of the shareholders in the company.
It is also worth noting, that the company would ultimately need to accept the registration of the transfer of shares through the board of Directors who may have a right to refuse to register the transfer of shares under the company’s articles of association. This could cause a conflict between the beneficiaries of your business under your Will and the Directors and the remaining shareholders. The Directors may simply refuse to register the transfer of shares in accordance with the articles of association provided they can demonstrate that they are not acting in bad faith, as they do have a duty to act in the best interests of the company at all times.
In order to avoid this scenario, it would be sensible to put a shareholders’ agreement in place, creating a contractual relationship between the shareholders and setting out what would happen to your shares in certain circumstances, including on your death. It is also advisable to amend the company’s articles of association to reflect the shareholders’ agreement and ensure the removal of the directors’ discretion on registration of share transfers in particular circumstances. It is strongly recommended that at the same time you make a Will you also review your company’s articles of association. If you would like some assistance with this, our Corporate & Commercial team can advise you on whether the company’s constitution is suitable for your needs.
Such a review is also important, for very different reasons, if you are the sole director and shareholder in a limited company. For companies incorporated before 1st October 2006, your Executors may be unable to appoint a new director to oversee the company, under the articles of association, without an Order from the Court. This can be problematic on a practical level where the business needs to continue after your death, for example, if there are wages that need to be paid out and other urgent financial matters to be attended to.
If you are in business in partnership with others, then it is crucial to check what the partnership agreement states to make sure that you are aware what would happen on your death. Some partnership agreements state that, following the valuation of your partnership share, the remaining partners would raise funds and purchase the deceased’s share of the business from the Estate of the deceased partner, often with payment being made by way of instalments over a particular period. It is important that the partnership agreement reflects your wishes. It may be appropriate to conduct a review of your current partnership agreement to see whether it requires any additions or amendments. Equally, if no partnership agreement exists, then the relevant legislation provides for dissolution of the partnership on your death, resulting in a sale of the assets and payment of outstanding liabilities which could result in a significantly lower return for your Estate than your share being acquired by continuing partners. Again, our Corporate & Commercial team can help you avoid that scenario.
Business Property Relief
A significant consideration when putting in place a Will that takes into account your business interests is inheritance tax and the availability of business property relief. The availability of business property relief is of particular importance given the rise in property values and the decision taken to keep the current inheritance tax nil rate band allowance at £325,000.00. Inheritance tax is charged at 40% which can have the effect in some situations of reducing the value of the Estate. Business property relief is one way of minimising the impact of inheritance tax. There are, however, various conditions affecting your eligibility for business property relief. For example, with shares in a limited company, you must have owned the shares for at least 2 years prior to death and the company must be a trading or services company rather than an investment company.
Whatever the nature of your business, we can help you to ensure that your Will reflects your intentions and avoid any unnecessary disputes between family members regarding what should happen to your business after your death.
Call and speak to a member of our team on 01244 312306