Running Your Business
Will power necessary
Around 60 per cent of the UK population do not have a will, according to solicitor Angharad Lynn. For a pharmacy owner, dying without leaving a will means that their estate will be passed on according to the intestacy rules, which changed in October 2014 when the Inheritance and Trustees Powers Act came into force.
Under these rules, if an individual dies leaving a spouse and children, the spouse will take the statutory legacy (currently £250,000) and the rest of the estate will be divided equally between the spouse and the children. If there are no children, the spouse inherits the whole estate.
The intestacy rules take no account of unmarried couples – if there are children, they will inherit everything; if not, the estate goes to other blood relatives. The surviving partner receives nothing.
An executor administers estates after death and it’s quite normal to appoint a spouse or children to this role. However, where business assets are involved, it is also worth appointing a professional who can ensure that these are dealt with as you would wish. This can be an individual, such as a solicitor or accountant. Alternatively, many professional firms have a trustee company that can act as an executor; this has the advantage of providing continuity for the appointment of executors, while an individual’s own lawyer or accountant may have retired (or died) by the time of death.
Tax relief may be available
Business Property Relief (BPR) may be available for a business or an interest in a business, as well as land, buildings, plant and equipment used in a business and shares in unquoted trading companies. BPR is currently awarded at 50 per cent or 100 per cent but since it’s a very generous relief from inheritance tax, its use may be curtailed in a future budget. So, when planning a succession, it should be ensured that the business will qualify for BPR by checking it meets the requirements of the scheme. To qualify, a business must be trading, but if the proportion of assets held in investments is too high, it may not be able to use BPR.
Business owners often want flexibility after death and it can be useful to leave business assets in a discretionary trust in the will, with the surviving spouse and children as potential beneficiaries. These flexible arrangements can allow decisions to be taken after death, rather than trying to predict the future at the time the will is made. After death, business interests can be kept in trust and income paid to children, or shares can be transferred out to children in appropriate proportions. A trust can also provide protection in situations where uninvolved family members inherit shares directly and want a say in the running of the business, despite not having the skills or experience. Those using a trust should include a letter of wishes to help guide trustees about how they envisage the trust being used after death. Although not legally binding, this can explain how an individual sees the capital and income of the trust fund being used.
It is also important to ensure that company documents, such as articles of incorporation and shareholder agreements, accord with a will. Some family businesses may only allow shares to be passed to direct descendants of the founder, so a spouse or stepchildren would not be included. If a will leaves shares to a spouse but the company’s constitution does not allow this, the gift will fail. Alternatively, if the business is run as a partnership, in the absence of a partnership agreement, the Partnership Act 1890 will apply and on the death of a partner, the partnership is dissolved; a surviving partner would have to wind up the business.
Finally, it is possible to leave instructions in a letter of wishes about the sale of the business and who may buy it. It is also possible to address issues such as who will run the company until the sale is completed and who the preferred buyer may be.
Dying without a will means that the wishes of the deceased remain unknown: the law will step in and determine how assets are distributed, leaving survivors with not what they expected.
Angharad Lynn is a solicitor in the private client team at law firm VWV.
Angharad Lynn is a solicitor in the private client team at
law firm VWV.