Business Succession Planning
If you are the sole proprietor of business, will it continue after your death and if it does, will your family have the skills to continue it?
If you own a business or are a partner or a shareholder in a business it is important to consider what will happen to that business after your death. This includes inter alia:
- Shareholders’ Agreements (perhaps giving business partners or co shareholders or family first refusal to purchase your shares).
- Cross Option Agreements (giving business partners or co-shareholders first refusal to purchase your share of the business).
- Key Man Insurance (paying a lump sum to enable business partners/ co-shareholders to purchase your interests)You should consult your accountant, solicitor or financial advisor about this. If you don’t have someone to help you, I can help
Inheritance Tax (“IHT”)
Some business assets are not liable to IHT on death (or transfer during life). The main IHT relief is on:
- Sole trader businesses
- An interest in a business (such as a partner)
- Unquoted shares and shares traded on the Unlisted Share Market (“USM”) or the Alternative Share Market (“AIM”)
- Unlisted securities which (perhaps in conjunction with other unquoted shares or securities) give the owner control of the company.
This relief, known as Business Property Relief (“BPR”), is at 100% of the value of the property or business and the property or business must have been owned for at least two years continuously on death (or on transfer during life).
- Business Property Releif is limited to 50% on:
- Listed shares which themselves or with other listed shares or securities give control of the company
- Land, buildings, plant and machinery used wholly or mainly in the business or partnership or company.
Business Property Relief is not available if:
- The company or business is wholly or mainly engaged in dealing with securities, stocks or shares, land or buildings, or in making or holding of investments
- The business is not carried out for gain
- The business (or shares in the company) is subject to a contract for sale.
Business Property Releif is a complicated aspect of Inheritance Tax and the above is only a brief and incomplete resume of the subject.
Similar provisions apply to Agricultural Property.
Subject to any shareholder/cross option agreements, your Will should give your Trustees (Executors) powers to carry on the running of the business on behalf of your family (without owning the financial interest you are leaving for the benefit of your family), making day-to-day and one-off decisions (such as selling the business) with suitable indemnities. So the choice of Trustees is very important (and could include business partners, co-shareholders, or accountants or solicitors with suitable business experience).
Having ascertained that Business Property Releif is available for a business asset, the next step is to make best use of the relief. If such an asset is left to a spouse or civil partner then the effect is that the Business Property Releif has been wasted, because any transfer to a spouse or civil partner is fully exempt from Inheritance Tax (ignoring foreign domicile issues). So the best way of dealing with business assets is to leave them to a discretionary trust in your Will.
The beneficiaries of such a discretionary the trust will be the people you want to benefit from the business asset (usually spouse/civil partner and children/grandchildren). The benefit of this for beneficiaries is that they need only draw down income or capital from the proceeds of any sale or dividends as and when they need it (or borrow the money from the trust and not worry about repaying it – with the consent of the trustees). This means that on the death of a beneficiary any cash still in the trust does not form part of their estate and so is not subject to Inheritance Tax.
The discretionary trust in the Will may be a new trust set up by the Will or an existing trust set up in the lifetime of the deceased,
Whether you are a business owner, director, partner or sole trader, safeguarding the future of your business with a Lasting Power of Attorney makes good business sense,
“As a business owner it is important to consider what might happen to the business if you should be incapacitated by illness or injury, who would take over the running of the business and its financial and property affairs, and what would it mean for your employees’ financial future,”
“Whilst there may be ‘an understanding’ amongst your colleagues of what would happen should illness or injury take you away from the business, in the eyes of the law this isn’t sufficient. Unless you have appointed an attorney, fundamental business operations may not be possible – access to bank accounts may be denied, suppliers won’t get paid, contracts could be compromised or lost, insurance premiums won’t be renewed, and salaries could go unpaid. Without an attorney appointed to take care of the business, the disruption to your company could be catastrophic, and it won’t take long for the impact to be felt.
“A business or commercial Lasting Power of Attorney – or LPA – is an important document to tackle this. You can use an LPA to appoint attorneys to deal with business matters and ensure business continuity in the event of your being unable to work.
“Commercial LPAs are different to normal LPAs that deal with your personal finances and affairs, and represent a vital element of your business continuity planning
With recent changes in legislation and case law it is now almost impossible to remove a company director who has lost mental capacity.
To remove them based upon an impairment would breach discrimination laws and even the courts are reluctant to fall foul of this legislation. This could lead to a Director in a position of authority making decisions and accessing company accounts without the remaining Directors being able to do anything about it.
The damage that could be done to a company does not bear thinking about and there is suggestion by legal experts is that this could lead to an influx of cases through the courts by Shareholders suing Directors who have not taken their responsibilities to the Company seriously
Every Director owes a Duty of Care to the Company and to their shareholders to ensure the smooth running and to do all that is within his power to prevent his actions from being detrimental. If the ability to remove that Director is now curtailed by the Equality and Discrimination legislation then what can be to protect the business?
The answer is simple, each Director should prepare a Business LPA which is a personal document authorising someone they trust to act on their behalf and step into their shoes should they be in a position where they no longer have capacity to carry out their duties. There are various occasions when the Business LPA would be useful. The loss of capacity due to mental illness is of course major concern but there could be a short term illness or injury which affected capacity as well as perhaps trips abroad which could require someone to deal with matters in their place.
Given the potential risk to Directors and their families from being sued by co-Directors and Shareholders for having not made sufficient provision it is now vital that everyone who runs a business has an LPA dealing specifically with their business affairs.
Quite often although the legislation covers specifically Company Directors should a case come before the courts concerning either a sole trader or a partnership then the courts are likely to apply the same principles.
Our trained Consultants can assist you in determining the potential risk to your business and advising on the requirements under the new legislation to protect your interests and your business.
What is a Lasting Power of Attorney?
“A Lasting Power of Attorney is a legal document which allows you to give another person (your attorney) authority to make decisions on your behalf. There are two types of LPA, one in respect of health and welfare decisions, and one for property and financial affairs.
“A health and welfare LPA will allow your attorney to make welfare and health care decisions on your behalf if you lack the mental capacity to make these decisions yourself.
“A property and financial affairs LPA is the one you need for your business. Once registered with the Office of the Public Guardian, it will allow your attorney to deal with property and finances, and is a flexible document that may be used before the onset of any mental incapacity (if you want it to) as well as lasting beyond.
“If you lose capacity and do not have an LPA, it may become necessary for an application to be made to the Court of Protection for an order appointing someone else to act on your behalf. This can be expensive and time consuming.
Appointing an attorney via the LPA to deal with property and financial affairs is a useful precaution against future incapacity. If you do not restrict the power, then your attorney can use the document to act at your direction if you are out of the country or physically incapacitated.
Your business Lasting Power of Attorney
“The first step in preparing a business LPA is a review of the company’s articles of associations, and partnership or shareholder agreements.
“Next you will need to identify a suitable attorney. This should be someone you trust and who you know you know is capable of doing the job how you want it done, is familiar with the business, and who has a similar outlook and knowledge of the market and business as you.
“Once in place, the LPA will allow your attorney to make financial decisions on your behalf, including buying and selling property, organising property insurance and repairs, accessing bank statements, opening and closing bank accounts, investing assets, and dealing with tax affairs.
“It is possible to appoint more than one attorney, and specify attorneys to act jointly in some matters, but separately in others. For example, a trusted business associate who knows the business could act on your behalf alongside a family member, to negotiate contracts independently of the second attorney, but only access bank accounts with the approval of the second attorney.
“Before your attorney accepts their role, ensure they fully understand the responsibilities. For example they must take out their own personal liability insurance to ensure they are protected whilst acting on your behalf, and commit to follow health and safety regulations and policies too.
“If the worst happens, your business will be in much better shape with an LPA, which makes good business sense and is right for the majority of companies irrespective of size. It should be the cornerstone of an effective business continuity plan.”