Succession planning for business owners

While many business owners are focused on growing their business, they often neglect to consider what will happen when they are no longer there to run it and have no estate plan in place.

Recent changes to the favourable inheritance tax regime for businesses in the October 2024 Budget have brought the succession of businesses into sharp focus.

Key things business owners should consider

Having a will

A will is the most basic estate planning document that enables business owners to specify how their assets will be distributed on death. They can also name executors, who will be responsible for managing and disbursing the personal and business assets according to the business owner’s wishes.

Prior to the recent Budget, business assets including unquoted shares in a trading business, could enjoy up to 100% relief from Inheritance Tax if they qualified for Business Relief (BR) (previously known as Business Property Relief). BR will now be capped so the most business assets will receive is 100% relief up to the value of £1million with any value exceeding that cap taxed at 20%.

While the changes to BR have limited the scope of the relief, it is still valuable and business owners should still review their wills to ensure tax planning opportunities are exploited and potential difficulties are avoided.

Lasting Powers of Attorney (LPAs)

LPAs are an excellent idea for everybody, especially business owners. An LPA enables the business owner to appoint individuals to manage their financial affairs if they become physically or mentally unable to do so. This is particularly important for those who run their own business.

If a business owner hasn’t signed an LPA appointing attorneys a Court application may be necessary to appoint a Deputy to manage the business owner’s affairs. This process is costly and the Deputy may not know or agree with the business owner’s wishes. It’s important to consider the partnership agreement or the company’s articles and any shareholder agreements as these documents may deal with the loss of capacity and the LPA should not conflict with these documents.

Lifetime gifts and succession planning

Developments within the business may also suggest that an early review of share ownership is desirable. A trend in the business from trading towards investment may mean that BR cannot be relied upon as a tax-efficient means of passing capital to younger generations. This is also true where the business will likely be sold or liquidated before the present owners die.

Lifetime gifts, appropriately timed and structured, can enable an important transition to be managed, and this is likely to become an even more important planning strategy following the changes to the BR regime.

Cross-option Agreements

Despite the changes to the BR regime, it remains important not to inadvertently lose the relief altogether with carelessly written company articles and shareholder agreements or partnership agreements. If these contain pre-emption rights which amount to a cast iron obligation to buy out the share of a deceased business owner, then BR will not be available. The solution is a cross-option agreement, which contains a right to sell the business to those continuing in the business (or the right for them to buy out a deceased’s share) which only becomes compulsory when exercised.

Business protection insurance

Insurance aims to provide the remaining business owners with tax efficient funding, which they can use to purchase the deceased business owner’s shares or partnership interests. Generally these policies are assigned to a specialist business protection trust. As a result of the Budget, such insurance may now also be necessary to fund any arising inheritance tax.

Please get in touch info@ts-p.co.uk, if you have any questions about the topics raised in this article.