Businesses: Plan Now For Tomorrow
The death or incapacity of owners and managers of businesses can have an enormous impact on any organisation, particularly small to medium-sized private companies or partnerships which have not made suitable plans.
When a shareholder dies, his family have a vested interest in wanting to maximise the value they get for his stake in the business. On the other hand, the other shareholders will want to reduce the costs of buying out the deceased’s share and minimise the disruption to the business which they continue to rely on for their income. This disruption can sometimes be caused by interference from the deceased’s family, who may have little or no business experience and who will, after all, be coping with their grief. Here are four business planning tips which can help to minimise the pain:
- Costly disputes can be avoided by well-drafted shareholders’ agreements (or partnership agreements) which can set out exactly what is to happen. Care must be taken to ensure such agreements give fellow shareholders the option to buy shares and the deceased’s executors the option to sell shares, perhaps at a predetermined price. These so-called “cross-option” agreements can preserve Business Property Relief for Inheritance Tax – a 40% tax saving that could be lost by the failure to plan properly.
- Funding the buy-out is also an issue – those who wish to continue the business must ensure they have enough money to do so. Suitable life assurance for shareholders or business partners can help here, but it is vital that a suitable trust deed is prepared to ensure the policy proceeds can be used by the remaining shareholders or partners for this purpose, rather than accidentally ending up in the business.
- Make a will! The majority of people in the UK still die without having left a valid will. This can cause all sorts of problems. The plight of small to medium-sized businesses can be made worse by having to deal with people who are not best placed to administer a deceased’s estate. Where there is no will there may be no obvious person to deal with at all. The deceased’s estate can also suffer if there is no clear plan for what is to happen on death – both in terms of higher tax bills and a failure to plan for who will take over the business on death. Integrated planning is the key for all concerned.
- Make a power of attorney! Death is one thorny issue, but what happens if a director or manager of a business suffers a stroke or an accident and cannot participate? This could be the death-knell of a small business, where the decision-making responsibility often lies with one person or a small group of people. Businesses can find themselves hamstrung if cheques cannot be signed or contracts formed. For this reason, those in command should appoint attorneys who know the business and have the time and ability to make suitable decisions. Like an insurance policy, you hope you will never need to call on it, but are glad it is there if you do.
Our solicitors here at Hughes Paddison have wide experience in dealing with these issues. We can offer effective estate planning solutions which can help to protect families and their businesses. We can also offer cost-effective, practical advice to resolve disputes if things go wrong.
Gareth Parry TEP
Head of Private Client Department
For further advice about these issues, contact Gareth Parry, Julie Hughes or Rachel Stewart.