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Wills and tax planning for business owners

September 19th, 2017 Posted by Accountancy 0 thoughts on “Wills and tax planning for business owners”

When running a business, it’s important to ensure that all business owners have an up to date Will and Power of Attorney in place.

However, it is common to concentrate on the everyday needs of your business, rather than your own financial affairs.

Having a Plan

Succession planning is essential, as the death of a business owner or business partner can have a major impact on the running of the business.

When making a Will, it is important to look at the structure of the business to avoid problems after death.

Sole traders

After the death of a sole trader, the Executor in the Will is usually required to take over the running if the business. Do you have someone in mind who would be suitable to take on this responsibility?  You can appoint a specialist solicitor to take on this role, relieving a lay Executor from the burden of administering the business.

Partnerships

Many business owners are not aware that a partnership may dissolve on the death of a partner, in the absence of an appropriately worded partnership agreement. This would not be the intention of most partners in a partnership.  They would, instead, wish for the surviving partners to purchase their share from their Executors, with reference to agreed valuations.  This can be put into effect with a partnership agreement.

It is, however, extremely important that a partnership agreement does not create a binding agreement to sell on death, as this may result in the loss of ‘Business Property Relief’ on death.

It is important to review an existing partnership agreement as your business evolves.

Limited Companies

A shareholders’ agreement is similar way to a partnership agreement, as it enables the shareholders to specify how to proceed in the event of their deaths. A cross option agreement generally allows the surviving shareholders an option to purchase the deceased’s shares on their death. It is usually linked to a life insurance policy (sometimes called ‘keyman insurance’ ) to provide the funds on death.

Inheritance Tax (‘IHT’)

Inheritance Tax is generally charged if an estate is worth more than £325,000.  This amount is known as the ‘nil rate band’.  Certain exemptions apply, should the estate pass to a spouse or charities.  An additional ‘residence nil rate band’ of £100,000 also applies, should the deceased own a residence, which is inherited by a statutory class of beneficiaries on death, such as a spouse, children, grandchildren etc.  IHT is generally charged at the rate of 40% above the ‘nil rate band’ and ‘residence nil rate band’.

Some businesses qualify for Business Property Relief (‘BPR’) from Inheritance Tax on death. BPR can result in a 50% to 100% reduction in Inheritance Tax depending on the type of business and other statutory provisions.

Tax Efficient Wills

When a business owner is married, it is usual to leave their estate to their partner on death.  However, it may be more tax efficient to divert the business assets into a trust. Their spouse can still benefit from the business assets (or cash equivalent should the assets be sold after death), although they do not ‘own’ the assets, therefore they are not part of the surviving spouse’s estate on their death. This potentially saves up 40% tax on the second death.

Powers of Attorney

Who would manage your finances if you lose capacity in the future?  This could be by way of something sudden, like an accident or something degenerative, such as dementia.  Unfortunately, this could happen to any of us at any age, and we must be practical in order to protect or loved ones.  A Power of Attorney enables to you appoint someone that you trust to manage your personal affairs, should you become incapable of doing so in the future.  You can also make an additional Power of Attorney to deal with your business affairs only.

If you have any questions, would like some advice or a new Will please contact Emma Pringle TEP, Private Client Partner at Savage Silk on 0774 385 7503 or at [email protected].

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