Top 7 tips for Owner Managed Businesses
One of the myths and legends about law is that the world of Wills and probate never changes: actually it is a field that has seen more legislative change over the past 10 years than just about any other. This hit home to us when discussing Wills for business owners with colleagues in our Commercial Property Department recently, so we thought we would put together a few handy tips:
Common-law spouses - contrary to what many people think - and to what is often reported in the newspapers - there is no such thing as a common-law husband or wife. Even for those who have been in committed, loving relationships for decades, there is no automatic right to inherit or to a split of property or assets. Wills for the unmarried are, therefore, doubly important, particularly where there are children or a business to be looked after.
Marriage revokes Wills – you may have made a Will, but that is not the end of the story. Wills need to be updated as your circumstances change, as well as your wishes. An example of this is making a well thought through Will protecting your unmarried partner and then getting married and not re-visiting your Will, because marriage has the effect of making your Will invalid (unless it is made in contemplation of marriage which can only apply in limited circumstances). A new Will is the only answer.
Maximising the inheritance tax nil rate band - most people know that there is a tax-free amount that can be passed on to beneficiaries. This nil rate band is set at £325,000 but it is possible to pass the benefit of this on to your husband or wife (or to a partner - though the way of doing this is more complicated) but only if your Will is setup correctly. Changes to the law that come into effect on 06 April 2017 will enable this nil rate band to be topped up by a Residence Nil Rate Band of £100,000, rising to £175,000 by 06 April 2020, meaning your children can benefit from a £1 million tax-free amount - but only if you set up everything correctly and are married. Remember, the general rate of inheritance tax is 40% so mistakes can be costly!
Business Property Relief for Inheritance Tax - owners of businesses that provide goods or services in return for payment - in other words, trading businesses - can (in theory) get 100% relief on their business interests. In other words, a business interest worth £1 million can be passed on to your children without suffering a £400,000 inheritance tax bill. Assets owned by you but used by the business can attract Business Property Relief at 50% - so a £500,000 commercial unit from which you run your trading business would only suffer 40% tax on half its value (£250,000). However, the Revenue deal with claims for Business Property Relief post death and only on a case-by-case basis. It is not a guaranteed relief so it is important to maximise your chances of getting the relief by taking advice and structuring things correctly during your lifetime. We can help you with this.
Option Agreements – are the lifesaver for Business Property Relief. A lot of company articles and shareholder agreements or partnership agreements contain pre-emption rights – the right for those continuing in the business to buy out the share of a deceased business owner. The Revenue's view is that if there is a cast iron obligation to turn a business interest into money, Business Property Relief will not apply. You may feel this runs against all notions of common sense, but there is a way around it, a way of giving those continuing with the business certainty, whilst allowing your family to benefit from the business’ value: Option Agreements with the right to sell the business to those continuing (or the right for them to buy out a deceased’s share) only become of a compulsory nature when exercised. This means that carefully planning your affairs can save many thousands of pounds and we often work with business owners to ensure this can happen.
Life assurance and pensions are not always what they seem - if you take out life assurance and it is payable to your executors, then all you have done is increased the size of your estate and therefore, the tax bill. By writing the proceeds in trust, it is often possible to save 40% inheritance tax whilst at the same time ensuring your beneficiaries benefit from the money. The value of pension pots - including SIPPS and SSAS - are generally outside of your estate, but it is important to give nominations to the trustees of the funds to ensure the right people benefit. This must be considered in the context of your Wills, to ensure that the correct balance is struck between giving people benefit and protecting the money for future generations. It surprises us how often this is overlooked as part of Wills and wealth planning.
A Business Lasting Power of Attorney - not strictly Wills, this, but Lasting Powers of Attorney (LPAs) are an excellent idea for everybody. They enable you to appoint people who can manage your financial affairs if you are ever in a position where you are unable to do so. This is particularly important for those who own businesses - can you imagine the difficulties that would be caused if only you could sign (perhaps as one of two signatories) and became ill (eg suffered a stroke?) To avoid people having to apply to the Court for permission to sign on your behalf, you could usefully give an LPA limited to your business affairs to enable a trusted friend or colleague to sign on your behalf, and you could give a second LPA to your wife, husband or partner to enable them to sign papers for your personal assets.
There is no substitute for effective planning and the costs of ensuring the continuity of your business can usually be charged to it. The bigger question might be whether you can afford not to address these problems. If you'd like to know more, than feel free to get in touch. An informal chat over a cup of coffee will usually give us enough information to be able to explain how we can help you to save money and what the costs of protecting your assets for your beneficiaries would be.
Gareth Parry TEP
Head of Private Client Department