27th November 2023
If you intend to pass your business assets or shares on to your spouse, family members or others once you’ve gone, you will want to make sure they end up where you want them to be and are passed on in the most tax-efficient way.
A Will is essential to ensure this happens – and there are also tax-efficient structures such as Discretionary Trusts which can help make sure the recipients receive maximum benefit from your assets.
Here’s what you need to know.
What happens to my business when I die if I don’t have a Will?
Just as you do with personal assets, it’s essential to be clear about your wishes for your business assets and set these out in a professionally drafted Will.
If you don’t, your family could end up in conflict about how the business is run, or the business could end up with someone who lacks the skills to run it. Ultimately this could affect the value of your business if it came to be sold.
It’s important to have conversations with your family, and anyone you may wish to have involved in the business, at an early stage and have a succession plan in place. That way, everyone is clear about your intentions and any preparation or training needed to ensure the ongoing success of the business can take place.
What happens to a business when a sole trader dies?
If you are a sole trader, and you have not specified in your will that someone else will take over the business, its assets and its operation, your business will come to an end upon your death.
In that case, all its assets will pass to the executors of your Will, along with any taxes, debts or other outstanding financial obligations associated with the business.
Often property is sold by the executors to cover debts and the remaining assets are passed on to beneficiaries of the Will.
If there is no Will, it will be almost impossible for anyone to take over the running of your business and its assets will be distributed, like your personal property, under intestacy rules. This usually means the remaining assets are passed to the closest surviving relative or, if there are none, to the Crown.
What happens to a business when I die if I am in a partnership?
This will depend on your business partnership agreements, which should include details of what happens if one of the partners dies. Such agreements would usually allow a deceased partner’s personal representative to step into their shoes on a temporary basis.
What happens after that is often specified in the deceased partner’s Will. It is common for their share of the partnership to be left to someone as a specific legacy in the Wil, or it may fall into the deceased’s estate and be passed on to the ultimate beneficiary of the estate.
If you are drawing up a Will, you must make sure that your wishes are not in conflict with any details of your partnership agreement. For this reason, it can be helpful if Wills are drawn up at the same time as any partnership agreement.
What happens to shares when a shareholder dies?
The shareholders of every jointly-owned company should consider what should happen to shares after the death of a shareholder. If the shareholders do not wish shares to be passed on according to a deceased’s will, agreements can be drawn up between the shareholders to ensure that a deceased shareholder’s estate can sell the shares in return for value.
What is a Discretionary Trust?
A Discretionary Trust can be a tax-efficient way to leave your business assets in your Will. A trust provides your executors with flexibility to make decisions about how to treat your business assets at the time of your death taking all relevant, current circumstances about potential beneficiaries and the business into account.
They are especially tax-efficient when leaving your business assets to a spouse, because of the rules around Inheritance Tax and Business Property Relief.
If your estate includes business property, your spouse is exempt from the Inheritance Tax it attracts. However, once this exemption applies, the assets do not qualify for Business Property Relief.
Leaving the assets that qualify for business property relief in a Discretionary Trust means they can either be retained tax-free within the trust, or you can choose to pass the assets on to the next generation outright, tax-free. This preserves the business property relief that would otherwise be lost by just passing assets outright to your spouse.
If the trust is retained, your spouse can have access to the income from the business for life before passing assets on to the next generation.
The Thrings Private Client team specialises in advising business owners on tax planning, wills and succession planning, and Discretionary Trusts. Find out more about the team here.