Business Meeting

BUSINESS PROTECTION

Hard work and dedication has meant that you have built up a sound business to benefit you and your family and naturally you would want to ensure that your loved ones are provided for in the event of your death. So what if the worst should happen and either you, or a business partner were to die?

Do you know who would actually be entitled to this share of the business?

Without a valid Will the deceased’s share would be subject to the Laws of Intestacy and the person who inherits may not be the person you intended. Would you or your business partner be content to run your business with their surviving spouse or their beneficiaries? This could have a major impact on the running of the business or the value of the business may now go down following the death of such a key person.

Without the appropriate Business Succession strategies:

  • Your spouse / partner and children may not inherit your share of a business.

  • Business partners may not be able to buy out the deceased’s share.

  • The surviving spouse or children may be obliged to take over the running of the business.

  • The value of the business could depreciate owing to the inexperience of any beneficiary

  • The business may have to be sold and the proceeds become liable to Inheritance Tax.


The information given does not provide specific advice and may not be suitable to your individual circumstances. 

Please note 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

 

EXIT & SUCCESSION STRATEGIES

Common Issues With Exit and Succession Strategies

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.

 
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Each Director leaves their share of the Business to their beneficiaries via their Will.

Consequences to Director A’s beneficiaries:

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.

Consequences to Director B

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

 

TYPICAL CROSS OPTION AGREEMENTS

Typical Cross Option agreements and the problems they create

But what about the impact a standard cross option agreement has on someone’s estate?

If you or a business partner dies their share will pass to their spouse or beneficiaries through their will. This is now deemed to be part of their estate. Whilst this share is held and the business continues trading then the assets could be exempt from Inheritance Tax if they qualify for Business Property Relief (BPR). Once the Cross Option has been affected then BPR is no longer available on the proceeds ie from any life assurance. The spouse’s assets assessable for Inheritance Tax (IHT) have now increased by the funds received from the life assurance policy risking 40% of the proceeds to IHT, which dependant on the size of the business could be a significant loss.

These assets are also now at risk from attack from any future remarriage claims, creditors or bankruptcy and Long Term Care costs.

What about the consequences a standard Cross Option agreement has for the surviving business partner?

With a standard Cross Option Agreement the surviving partner now owns 100% of the company. This is fine whilst the business is still trading and whilst BPR is still applicable.


However, what would happen when they decide to sell the business?

Now their personal estate will be increased to include the proceeds from the sale, as for the spouse this leaves them wide open to attack from Inheritance tax, creditors / bankruptcy, divorce settlements and Long Term Care costs.

 

WHY YOU NEED AN EXIT STRATEGY

Making a Company Will in your lifetime could not be easier if set out correctly. All the objectives and aspirations of the shareholder or partners are taken into consideration. With our bespoke service and trained qualified team we will ensure every aspect is covered to ensure your business Will follows your wishes of your personal Will.

Most advisers will end the advice at this point and promise to review the protection and needs of the shareholders annually. But what about beyond death planning of a shareholder, that’s where Countrywide really specialise and are proud to be head and shoulders above the rest.

As an existing business owner you'll have a clear vision of what you want to achieve from it and more importantly what you want when you retire or sell your shares. To maximise the value you get from the business it's essential to think about how you'll leave it further down the line.

Carefully planning your exit from the business can help you to:

  • mould your business into the ideal shape for your chosen exit option - maximising the value you get from it

  • groom successors if they're coming from within the business - whether they're a family member or part of your management team

  • exit at a time of your choosing, when the business is doing well and the market conditions are advantageous


Ideally, you should include an exit strategy in your start-up business plan. It can then be reviewed and revised whenever you work on your annual business plan and budget - and you can steer your business in the direction that your exit option demands.

If you manage an existing business and don't have an exit plan, you should now think about what your preferred exit option might be - and consider whether you could change the way you run your business to help you achieve it.


The way in which you exit can affect:

  • the value you and other shareholders realise from the business

  • whether you receive a cash deal, deferred or staged payments

  • the future success of the business and its products or services

  • whether you retain any involvement in or control of your business

  • your tax liabilities


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

 

SHARE RELEASE EXIT STRATEGY

Presently shares within your Company can present an issue if the company was to be sold in the future.

Capital Gains Tax would usually be charged to the shareholder upon sale. The current full rate is 28%. Entrepreneur’s relief may be available up to the first £10 million for each shareholder. This is dependent on any previous disposals since 6th April 2008 and the trading status of the company. The latter can be affected by the nature of assets held by the company.

Whilst the shares may qualify under current Business Property Relief and so be free from IHT, when sold these shares are replaced by cash which will be included in an individual’s estate for IHT purposes and thus taxed at 40%.

Taking appropriate advice from our unique advisers can maximise the tax efficiency of how you exit and take your funds on the sale of your shares using a Share Release Trust, shares enter a separate trust, The Share Release Trust.

This allows:

  • The shares to be sold free of CGT (Shareholder retains his full Entrepreneurs Relief to be used at a later date maybe).

  • Reinvestment can be made Capital Gains Tax free.

  • Income returns are Income Tax free.

  • The share sales proceeds fall outside the estate and so no future IHT liability.

  • The benefit of the tax free environment passes down the generations as the structure is still retained.




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

 

BUSINESS PLANNING: OVERVIEW

If you are a business owner, you are faced with a range of important issues. Here are just a few:

  • How do you extract your profits in the most tax-efficient way?

  • What is the most effective way to reward and motivate employees?

  • How should you make sure that you can afford to retire?

  • To whom will you pass on the business when you retire?

  • How will you finance expansion?

  • What would happen to the business if you (or your co-owner) were to die or fall seriously ill?


Tax rules are subject to change. The FCA does not regulate tax advice.