Let us first assume that you have made a Will in favour of your spouse or partner and that they inherit the family business or your share of a business.
Would they even want to be involved with the running of the business?
Many spouses would probably not want to be burdened with the running of a business they may know very little about. For instance, if there are young children to care and provide for then the surviving spouse might prefer to be bought out.
Would there be sufficient funds to purchase the share of deceased Director from his family? Or would the business have to be sold?
If the business is sold by the deceased’s beneficiaries, how would this impact on their estate as their assets increase? How would it also affect the surviving business partner’s assets as these too increase? Both parties’ estates could be impacted by Inheritance Tax in the future, having now lost any Business Property Relief previously available whilst the company was still trading. With the sale of the business you risk losing 40% of the cash proceeds to the tax man.
Typical Planning - Will only
Note: This information is applicable to Ltd Companies or Partnerships. The examples illustrate a 2 partner business but are also applicable to multiple shareholders / partners.
Each Director leaves their share of the Business to their beneficiaries via their Will.
|Consequences to Director A’s beneficiaries||Consequences to Director B|
|Beneficiaries will now own part of the company which they may not want to run.
Share of company is now part of beneficiaries’ estates and therefore is at risk from divorce, remarriage, bankruptcy and long term care.
If beneficiaries decide to sell the business the proceeds will enter their estates creating a potential IHT liability on their death.
|May not want to run company in partnership with Director A’s beneficiaries.
May not have the funds to buy out Director A’s share of the business.
Note: The effects of the above problems would increase considerably if the company share is a minority holding.
Perhaps you have made some provision for this eventuality.
You may feel that you have prepared for the worst and taken out sufficient life cover to protect all parties’ shares of the business. You may even have had the presence of mind to set up a Company Will and a Cross Option Agreement.
This would ensure that the surviving business partner/s has the right to buy out the deceased’s share of the business and the proceeds of the life assurance policy could be paid to the surviving spouse or beneficiaries in exchange for their inherited share of the business. Equally, the surviving spouse or beneficiaries would be able to exercise their right to sell this share of the business to the remaining business partner/s in exchange for either the market value or an agreed amount covered by a life assurance policy.
The information given does not provide specific advice and may not be suitable to your individual circumstances.
Please not that the Financial Conduct Authority do not do not regulate some forms of Trust products & services. These services are provided by our sister company Countrywide Tax & Trust Corporation Ltd