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Business Services  •  Business Tax  •  IHT

What’s your ultimate succession plan?

By RJP LLP on 17 May 2024

Are you one of the people in this country without a will? According to the FT, 50% of people in the UK don’t have a will, and even if they did write one once, it is probably out of date.

Given that so many people are at risk of intestacy on a personal level, it’s not surprising that the situation is very similar for business owners too. Millions of company directors and proprietors of small, private businesses in the UK do not have succession plans in place in the event of their death. This lack of planning could mean risking the future viability of their business and its employees. It may also result in unwanted tax liabilities that could be entirely avoided.

Here are some of the key things to consider when it comes to long term succession planning for the future of your business.

Is your business more than just you?

Some businesses essentially rely on one person and if that person was removed from the business, it would be unlikely to survive. Or, if a business does have employees but the real goodwill and intellectual property stems from a single individual, the same future could be in store. If this is the case, the business is unlikely to have much value in the event of the death of the key person, but plans need to be in place to enable someone else to wind the operation down and distribute any assets.

Could someone else continue your business?

An established business, or company, that does not rely on one individual may be able to survive if the leading individual passes away, and it may be possible to arrange a sale or a management buyout. In this case it is useful to have a partnership agreement or shareholders’ agreement in place, as appropriate, detailing what should happen to all owners’ or shareholders’ shares of the business after death.

Consider the cost of employing your replacement

It might not be appropriate for every business but in some cases, it might be necessary to employ someone very experienced to replace whoever was the original ‘face’ of the business. This can be expensive and one way to plan ahead for this is for the business to take out insurance that will pay out a lump sum in the event of the death of a key person, which can be used to pay a salary to a replacement individual whilst the business recovers.

Keeping it in the family

Sometimes in a family business, there is a clear successor. One person might be keen to continue the legacy even if their siblings are less interested. In such cases, a clear plan of intent needs to be documented in advance, to outline exactly what will happen in the event of death. It should detail who is entitled to shares and the type of shares, rights to dividends, additional income rights and longer-term plans. If multiple children are involved, this helps everyone to be in agreement.

 

Will your business share qualify for BPR?

Business Property Relief (BPR) is an inheritance tax (IHT) tax relief available for a qualifying interest in a business, or for shares in an unquoted trading company. This helps to enable these businesses to continue trading after the death of an owner or key person, without the burden of an IHT liability.

There are strict qualifying conditions for BPR to be available. For example, it may not be available to a business that contains unusually large amounts of cash and very few other assets. It may also not be available if plans to sell the company were already underway when the owner died.

Returning to the scenario where a business is very cash rich; this is common in consulting companies with a single director e.g. IT contractors. Many limited company shareholders shelter revenues in the company that are not needed as remuneration, rather than pay the extra tax by extracting the funds as salary or dividend. For shares in the estate to be entitled to BPR on death, it is important to find ways to extract profits from the company. This can be done tax efficiently, over a period of time.

 

How are company owned property assets treated?

Another consideration is property that is owned by a company. Where a company owns the property from which it trades, the BPR relief available for the shares in that company will not be affected, because the property is a trading asset. Where however a company owns property that is rented out, this is an investment rather than a trading asset and will affect the level of BPR available.

Should you skip a generation?

One important consideration where BPR is available, is whether to skip spouses, and leave qualifying business assets or shares to children or grandchildren instead. If an asset is left to a spouse, it is IHT exempt because it is covered by the spouse exemption, making the availability of BPR excess to requirements. The beneficiary spouse may then liquidate the business assets and be left with cash. Even if they make lifetime gifts, this cash will not leave their estate fully for IHT purposes for 7 years. An alternative consideration is to leave assets covered by BPR to the next generation rather than to your spouse in your will, thereby moving them down a generation without incurring IHT.

As this article highlights, if you are running your own business, succession planning is very important and there are many things to consider. If you would like to discuss the tax implications of your business estate or consider tax advantaged options, please contact us via partners@rjp.co.uk.

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