No one likes to plan for their own death. That is why fewer than 40% of the Scottish population are believed to have a Will. If you have your own business, it may be even more tempting to put your head in the sand. However, it is dangerous to put these things off for too long, and business owners have a lot to lose if they fail to plan appropriately.
Here are 4 key questions that will help you to start to think about this:
1. What is your lifetime plan for the business?
Before tackling what happens when you die, it helps if you know what you want to happen during your lifetime. If you are planning to move on to new challenges or to retire, you need to know in advance how you are going to accomplish that. There are now more options than ever before, including:
- Trade sale to a commercial buyer
- Employee ownership – either a buy-out (EBO) or an employee ownership trust (EOT)
- Management buy-outs (MBO)
- Direct handover to a family member
- Wind-up of business and sale of assets
Each of those options come with their own set of considerations, but they all require time: time for you to ensure your business is in good shape for someone to carry out due diligence; time to find buyers; and time for you to get commercial & operational matters ready so that you can walk away when the time is right. Accordingly, making a plan at an early stage is key. Taking advice from our Corporate & Commercial team and a suitable business accountant will help you to do this.
2. What does your Will say about the matter?
Even if you have a complicated business, you do not necessarily need a complicated Will. All Wills need to contend with two key issues: administration and inheritance.
Administration: the executors appointed under your Will may need to become closely involved with running the business during the period that your estate is being administered. That will generally be 6 months at a minimum, and potentially a good bit longer than that. On one hand, the executors may simply need to ensure that the business is given a soft-landing in order that it can be gradually wound-up. On the other hand, they may need to actively run the business for a time in order that it can be smoothly passed on to your beneficiaries as a going concern. As such, you need to appoint the right people who can do this job effectively. You could appoint a combination of capable family members and professionals, for example.
Inheritance: if you are planning for a family member to take over the business, then it may be sensible to specifically leave your business assets to them within your Will. On the other hand, if the business is simply to be wound-up on your death, then your Will might simply direct all of your business and non-business assets to be sold and the proceeds paid to your beneficiaries in whatever percentages or shares you prefer. You may also need to balance the interests of family members who are to receive the business against those who are not.
A well-thought-out Will can protect the business for the next generation of owners, and it can also avoid wrangling between family members. A poorly considered Will (or no Will at all) may have entirely the opposite effect!
3. What is your inheritance tax (IHT) position?
Depending on the nature of your business, you may expect that your share of the business will qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR) upon your death. These are valuable tax reliefs, but there are important rules about what assets they do and do not cover. If you simply presume that all of your business assets will be covered, then you may be making an expensive mistake.
Even if a big part of your estate will be covered by BPR or APR, you should not rest on your laurels. Your interest in the business may qualify for BPR if you die while holding it, but if you had already retired and sold-up prior to your death, then the cash proceeds would not qualify for that same tax relief.
One option could be to adjust your Will so as to leave BPR-qualifying assets directly to your children rather than to your spouse. That may avoid the situation where the business is sold after your death and the proceeds are paid to your spouse, only for those proceeds to be exposed to IHT when your spouse dies themselves. Instead, a child could inherit the business directly, they can still sell the business if they wish, and thus that part of your estate would have reached the next generation with much less tax exposure. This requires careful financial planning, of course, as it is important to balance the interests of a surviving spouse against the overall IHT position.
4. Do you have a “legal rights” situation to consider?
If you are domiciled in Scotland, then you cannot fully disinherit a child or a spouse: they will always have the right to make a claim on your estate. That is known as “legal rights”, and it allows that person to claim a fraction of your moveable estate. The claim does not cover land and buildings. However, there is a pitfall here: land and buildings may be owned by the business (e.g. the company or partnership) rather than by the individual. In that case, the value of the land is reflected in the value of the individual’s shareholding or partnership interest. Those are items of moveable property, and so are exposed to legal rights. This means that the value of the land etc. can come back into the picture for legal rights. Given that land and buildings often make up a sizeable part of a business balance sheet, this can create a real problem if legal rights are claimed. It would not be the first time that a business has had to be broken-up in order to pay a legal rights claim. It pays to plan ahead!
The Private Client team at Blackadders are experienced in advising individuals and families about all manner of estate planning matters. Whether it is Wills, Powers of Attorney or inheritance tax planning, we can design a solution that fits.
Stewart Dunbar WS, Associate Solicitor
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