Inheritance tax update – why business owners need a Will 

If you own a business partnership or have shares in a private trading company, this will likely have a big impact on how you should write your Will. 

Have you thought about what happens to your business or business interests if you die without a Will? 

 If you are sole trader, the business will end when you die and the business assets will pass to your executors (if you have a Will).  If you do not have a Will, your estate will come under the control of the administrators of your estate.  Your executors or administrators will need to pay debts and taxes for which your estate is liable. This may mean that some of your business assets need to be sold to fund these bills. 

 If you are in a business partnership or have shares in a private trading company, your interest in the business will pass to your executors or administrators.  How the executors or administrators deal with your business interests depends on whether the other partners have the option to buy your interest before your executors sell/transfer them to anyone else.  The partnership or shareholders agreement (if there is one) will also need to be reviewed to see if there are any terms that need to be complied with on the death of a partner/ shareholder. If your interest is sold, the proceeds will pass in accordance with your Will or the legal rules which govern your estate if you do not have a Will, known as the Intestacy Rules. 

What does it mean for your family if you have business interests?

We will look at an example for a family that have a business and young children.

Zach and Jasmine are married and have two children together, Darcie (17) and Riley (12).  Zach and Jasmine do not have Wills. Zach and Jasmine believe that they do not need Wills because they think that their assets will simply pass to the other if one of them dies, which is what they want to happen. 

The couple have a gardening and landscaping business together and the latest company accounts show the value of their business to be £3.2m.  Their home, which is held jointly, is worth approximately £800,000.  Jasmine has an investment portfolio of £200,000, Zach has cash savings on £20,000 and they have £50,000 in a joint savings account.  

Their combined estate is £4.27 million. 

Let’s look at what happens if Jasmine dies (without a Will) before Zach. 

• Assets held as joint tenants automatically pass to the surviving owner, regardless of the terms of any Will. In this scenario, their home is held as joint tenants so Zach will inherit it together with the joint savings accounts.  

• The Intestacy Rules will govern who inherits the remainder of Jasmine’s estate and in what proportions.   

• Under these rules, Zach inherits the first £322,000 of Jasmine’s estate plus half of the rest of Jasmine’s estate (the “residuary estate”), which includes her share of the business. 

• After the deduction of the inheritance tax (IHT) allowances available for Jasmine’s estate, the remaining half share of residue passes to Darcie and Riley who are “non-exempt” beneficiaries for IHT purposes.  They will receive a large inheritance, which includes the business.  They are under 18 so their inheritance is held on trust until they reach 18, (which for Darcie is only one year away), when they become entitled to their inheritance. A key concern is that this may not be appropriate if they have not yet reached financial maturity, as it risks the inheritance being squandered. 

• It may be necessary to liquidate assets to fund the IHT bill. 

How could Zach and Jasmine have planned better? 

• It’s likely that they would not want the Intestacy Rules to govern the inheritance of their assets. A Will can help prevent them from applying.  

• A flexible and tax efficient solution would be to leave the shares or partnership interest to a trust, the beneficiaries of which would be family members and perhaps close family friends.  This would take into account changing circumstances such as the age/ability of intended recipients and the value and nature of their estate at death. 

• They could have structured their Wills to take advantage of the spouse exemption which means that, provided certain criteria are met, any gifts to a spouse will not be subject to IHT. This could mean that there is no IHT to pay when the first spouse dies. 

• Careful advice surrounding the IHT liability and business assets could have been sought to preserve their assets and prevent the sale of the assets to pay the IHT due.  

• Depending on the financial maturity of Darcie and Riley, the couple may like to include provisions to specify they age at which they are to inherit. 

What should I be thinking about when making a Will?

If you own an interest in a business, you need to make sure that the partnership or shareholders agreement doesn’t conflict with the terms of your Will.   It’s also important to consider whether someone wants to be involved with your business before leaving it to them. If they are likely to sell it, there might be more efficient ways to pass the value on to them.  

Without a Will, your business could pass to someone who has no interest in running it, or someone who lacks the necessary skills to run it properly.  There is also a risk that your business could pass to multiple people who are in conflict about how it should be run. In addition, if there are employees, consider whether you have sufficient provisions in place to ensure that they continue to be paid after your death. 

How can Kreston Reeves Private Client help you? 

Our team of experienced solicitors can help business owners plan their Wills effectively.  If you would like to know more, please contact our team to find out how they can help you.