By Sarah Nettleship,
Partner, Wills, Estate & Tax Planning,
Thomson Snell & Passmore
While many business owners are focused on growing their business, they often neglect to consider what will happen when they are no longer there to run it.
Key estate planning measures that business owners should consider are:
Having a will
A will is the most crucial estate planning document because it enables a business owner to specify how their assets will be distributed on death.
It is also important to consider inheritance tax. Business Relief (BR) has now been capped so that a maximum of £2.5million of qualifying assets per person can be transferred on death free of inheritance tax. However, this relief is still valuable and business owners should review their wills to take advantage of tax planning opportunities.
Lasting Powers of
Attorney (LPAs)
An LPA enables the business owner to appoint individuals to manage their financial affairs if they become physically or mentally unable to do so. This is particularly important for those who run their own business.
Lifetime gifts and succession planning
Developments within the business may influence whether lifetime gifts are desirable. For example, if the business moves from trading towards investment, it is likely that BR will be lost as the underlying business assets will no longer qualify for the relief. This is also true where the business will likely be sold or liquidated before the present owners die as the owners will have swapped a qualifying asset for cash or other non-qualifying assets.
However, lifetime gifts, appropriately timed and structured, can enable an important transition to be managed tax efficiently.
Cross-option Agreements
Despite the changes to the BR regime, it remains important not to inadvertently lose the relief altogether with carelessly written company articles and shareholder agreements or partnership agreements. For example, if these contain pre-emption rights which amount to a cast iron obligation for a co-owner to buy out the share of a deceased owner, then BR will not be available. The solution is to use a cross-option agreement instead. This can be particularly important where it is very unlikely that a surviving spouse will continue to be involved in the business.
Business protection insurance
Insurance aims to provide the remaining business owners with tax efficient funding, which they can use to purchase the deceased business owner’s shares or partnership interests. Generally, these policies are assigned to a specialist business protection trust. Such insurance may now also be necessary to fund any arising inheritance tax as a result of BR not covering the business assets in their entirety.
