Does your will take account of your business assets?

2nd February 2015

It is not unusual for those with business interests to not have wills or to have wills which are not structured to take account of their business assets. This article briefly examines some options available to the business owner.

The general principle for the passing on of our assets is that we can leave them to whomsoever we choose. This is subject to a right for certain individuals to make claims against estates. The provisions of a will are also subject to preexisting agreements such as a shareholders agreement or the provisions of a partnership deed. It is essential to review such provisions in order to understand how the business asset can be left. Is the partnership share or company shares (´the business asset`) to pass to family members who may be outside the business? Alternatively, is the business asset to be retained by the existing partners and shareholders? If that is the case, how is the family of a deceased partner/shareholder to be provided for?

The answers to these questions will depend on the circumstances, but care is needed to set down clearly what has been agreed between the various parties.

Once these provisions are understood, a will should be drawn up so the wishes are reflected on death. This may, for instance, simply direct the transfer of company shares to a permitted beneficiary under the articles or shareholders´ agreement. Even if a partner or shareholder chooses to buy out a partner or shareholder, then there are opportunities to take advantage of the generous provisions governing business property relief for Inheritance Tax purposes. Basically, so long as a partnership or company is trading and the business asset has been held for two years then relief should be granted at 100%. For those with spouses or civil partners there is the option of crystallizing business property relief so that the sale proceeds of a business asset pass to a discretionary trust. The spouse or civil partner can still potentially benefit but the value of the business interest is then held outside their own Inheritance tax estate (although subject to the lesser rate of Inheritance tax for trusts).

A further opportunity arises when the actual business asset passes to a trust and the surviving spouse/ civil partner is then able to purchase the business asset from the trust. This means that the survivor has transferred assets which would be subject to inheritance tax to the trust and will instead hold an asset which should benefit from 100% relief after two years. If a will is structured correctly then this ´double dip` planning can lead to considerable inheritance tax savings. Equally, the interaction of the spouse and business relief can lead to a considerable amount of extra inheritance tax being due if a will is structured incorrectly.