A large portion of UK business owners are now approaching retirement age, and with so many things constantly competing for their attention, it is easy for them to neglect putting a proper plan in place for the inevitable.
This series of articles emphasises the significance of proper estate planning for business owners who are looking to minimise tax and protect the value in their business so that their loved ones can enjoy the fruits of their labour.
What is estate planning and what should I consider as a business owner?
Proper estate planning can be very complex with many different facets and an array of both legal and financial points to consider.
A common misconception is that estate planning is only for the wealthy, which is not true. Everybody, even those without apparent inheritance tax concerns, benefits from having their assets and finances properly taken care of following significant life events – whether that be death, incapacity or planned retirement.
However, business owners especially can use legal estate planning documents as important tools to assist with succession planning and the continuity of their business.
Savvy business owners will consider the fate of their business following their death, incapacity or retirement and will use a range of different estate planning methods to formalise their wishes concerning the distribution of their personal and business assets.
There are various different forms of estate planning, and each can be beneficial to business owners for a number of reasons.
Wills
Without a Will in place, your assets would pass according to the “rules of intestacy”. Depending on your circumstances this may mean the estate is shared between your spouse and your children – or, if you have neither, other relatives. This means you would have no say on who will inherit your assets.
- An up-to-date Will dealing with all your personal and business assets will prevent (partial) intestacy. Intestacy could result in your assets getting into the wrong hands or an unsuitable successor inheriting your shares / business assets.
- A comprehensive Will reduces the likelihood of family disputes over the division of your (business) assets and may help prevent the need for litigation (which can be costly, time-consuming and a stressful experience).
- Often business assets are eligible for reduced Inheritance Tax (“IHT”), or pass entirely tax free, because of Business Property Relief (“BPR”). But the interaction between BPR and other tax reliefs – such as the spouse exemption – requires careful consideration; as does the risk of the relief being lost if the business ceases trading after your death. Careful drafting of your Will, such as including a suitable trust in the Will, can help make sure your assets pass to your beneficiaries as tax efficiently as possible.
- Putting assets into a Will trust can help you plan for the future as the trust assets will not form part of your beneficiaries’ estates. From a tax planning perspective, this can be particularly valuable if the assets cease to be eligible for BPR after your death (such as if the business is sold); but the trust can also protect the business if a beneficiary goes through difficult times such as insolvency or divorce.
- Wills are particularly necessary for sole traders, whose business assets will pass through their estate given that the assets are not owned by a registered company (which in the eyes of the law is a separate “person” and a legal entity in its own right).
- Will trusts can also come in handy for sole traders whose assets look likely to exceed the Nil-Rate Band (“NRB”) – the NRB is the amount of your estate that can pass to your beneficiaries free of tax before any IHT is payable. Reforms to the NRB were considered recently, however, the government confirmed that (at least for now) the NRB allowance is fixed at £325k until April 2028.
Trusts
Trust law and taxation are very complex areas of law; every individual’s circumstances are unique and each client requires bespoke advice.
Unlike companies, trusts are not regarded as their own separate person or entity as such, but they are subject to their own taxation regimes and considered as their own entity for tax purposes. This means that there will be (separate) tax issues to consider when using trusts.
It is also important to note that if you put assets into a trust, you must normally give up any right to benefit personally from that trust (and the assets within it). While the use of trusts can be a valuable part of succession planning, you do need to be careful not to give away assets that provide you with a valuable income or which you might need in the future.
In contrast with will trusts which are created upon the date of death, trusts can also be created during the lifetime (called ‘lifetime’ or ‘inter-vivos’ trusts) and can prove valuable for a number of reasons:
- Trusts can be an effective way of mitigating IHT as the legal title to the assets held in trust belongs to the trustees of the trust (in their capacity as trustees) rather than being regarded as personal assets.
- The use of trusts can be very beneficial where business assets are involved, for example:
- Shares can be put into a discretionary trust where beneficiaries can receive income and / or capital from the trust, but the trustees retain control of the shares.
- You can appoint yourself, fellow business owners or anybody with the relevant skills (which the executors of your personal estate may not possess) to act as trustees to retain control of the business. Your beneficiaries will benefit from the shares held in trust without getting involved with the running of the business.
- Using a discretionary trust allows you the flexibility to ‘balance up’ between children, potentially rewarding a child who has been actively involved in the business and / or compensating a child who hasn’t.
- If the business is sold during your lifetime, the sale proceeds can be held in a trust fund for beneficiaries so that the proceeds do not form part of your taxable estate.
Lasting Powers of Attorney (LPAs)
LPAs are a legal device allowing individuals to appoint a person (or persons) they trust to make decisions on their behalf should they ever lose the capacity to make decisions themselves. Some people associate LPAs solely with an attorney making decisions concerning Health and Welfare, where a family member or friend is usually nominated to make decisions concerning medical care, permanent residence etc.
However, that is not the whole story! Financial attorneys can also be appointed to make Property and Financial decisions. This type of LPA can be particularly advantageous to business owners, who can nominate an appropriate person with the relevant skills (potentially a fellow business owner / director) to take over their finances and property, deciding on matters like money, tax and bills, bank / building society accounts, property and investments, pensions and benefits etc.
- Business owners may appoint a financial attorney to manage their business affairs by enabling the business to continue, arranging a sale etc.
- Different LPAs can be put in place for different aspects of your affairs – for example, you can choose one set of attorneys for your business affairs and a different set for your personal finances.
- You can stipulate that your attorneys can make decisions either jointly or severally.
- If you lost capacity as a director of a company, and your company uses the Model Articles of Association (which most companies do), you would lose your place on the company board – you may want to consider putting a mechanism in place for the appointment of a replacement director in such an event.
- The above issues are magnified where the sole director of a company loses capacity without a financial LPA (and the related documents) in place.
Many assume that they would never lose the capacity to make decisions for themselves, but these things can happen quickly and unexpectedly (e.g. a road traffic accident).
Life is full of unexpected turns, so it is crucial to appoint an LPA before losing the capacity to make decisions yourself, as family members / friends would not be able to take over your finances without a Power of Attorney in place.
If you lose capacity without having an LPA in place, then nobody else (including your family members) will have the legal authority to deal with your financial affairs. Your family would have to endure the stress of applying for what is known as a ‘deputyship’ through the Court of Protection, which can have negative financial implications.
A deputy is similar to an attorney; however they are appointed after capacity has been lost, and their powers are more restricted. Such as is the case with many things in life – it is better to be proactive rather than reactive.
In Part 2 of our series on tax, estate and lifetime planning for business owners, we will look at ways that business owners can effectively plan for tax, making use of the tax reliefs and exemptions available to them. Click here to visit part 2 of our blog series.
If you would like advice concerning your tax or estate planning, or in connection with your existing estate planning documents, speak to one of our Private Client solicitors today and find out how we can help. Please contact us by telephone on 03456 465 465 or email enquiries@rotherabray.co.uk.
Disclaimer: This blog is for information only and does not constitute legal advice. If you need legal advice please contact us on 03456 465 465> or email enquiries@rotherabray.co.uk to get tailored advice specific to your circumstances from our qualified lawyers.
