Article reference: UK-IA-WIL04

Leaving your business in your will

Every self employed person has agonised over the question of what would happen to his or her business if he or she should die.

Whatever your age or stage in life, it is certain to be a worry. The question is as relevant to a 30 year old entrepreneur with two children and a hefty mortgage as it is to someone in his or her sixties who has begun to consider who will take it over.

This article addresses some of the possibilities.

The structure of your business

First, let us consider the subject matter. You may be a sole trader, or a partner or you may conduct your business through a limited company. You may own a majority or minority shareholding.

As a sole trader, you are free to make whatever decision you like. That is also true if you own 100% of the shares in a company.

But if you are a partner or own less than 100% of the company, you may be circumscribed by the partnership agreement, or exit clauses in the shareholders’ agreement, or simply by the complications of being involved with others.

For example:

Maybe your father left the family business to you and to your brother or sister. You have a good relationship and the business has prospered.

You have three children. Your sibling has just one.

When you die, your shares could be divided three ways. Your brother or sister’s shares will all go to your niece or nephew. That child will then have far greater power than any one of your children.

Well drawn shareholders' and partnership agreements will have thorough and practical exit provisions. Check carefully. If you are bound by an agreement you do not like, contact the other parties and see what changes can be made. Exit provisions usually favour those remaining over someone departing, even if the departure was unexpected and unintentional.

From this point, we assume that your business is contained in a limited company in which you own all or most of the shares.

Decide on the beneficiaries to inherit the business

We assume that your beneficiaries are your children and spouse, but in your case you may have to consider alternatively or in addition: a former spouse, brothers, sisters, parents, and other relatives.

Whoever the beneficiaries are, your choices will depend on how you perceive the personal circumstances of each of them. Equality for children is fine in principle, but what if, before you die, one of them suffers a severe injury, has a divorce, has four more children, emigrates, builds a large business of his own, or whatever else you may imagine?

The question you need to address is who will run and build the business?

Every older commercial lawyer will have tales to tell about the family business that goes downhill after the death of the last family director. There are some amazing examples of a wife taking over a business on the death of her husband, but they are the exception, not the rule. If your spouse has stayed out of your business until now, she is unlikely to become an entrepreneur, strategist, and tactician and just because you have the misfortune to die in an accident.

Furthermore, in the writer’s experience, the personality, skill and experience of running a business do not pass down the generations. Only you can assess the suitability of your children to business management. Your assessment will dictate the decisions you make as to your will.

However, we absolutely advise that you should not leave a controlling interest equally between your children. Stalemate is a disaster. If you have an odd number of children, the voting powers are more evenly distributed - if three children own one third each, any one of them has the balance of power between the other two. But if you leave the business to an even number of children, make sure decisions can be made come what may.

What about value of your other assets?

Before we look on the bright side at possible answers to these dilemmas, I remind you that the courses of action open to you will be expanded or reduced according to the flexibility you enjoy by owning other valuable assets. If equality is a prime aim, giving the business exclusively to one beneficiary may create a problem in the future if the business is an outstanding failure or success. But if others have had cash instead, they are less likely to complain.

What you cannot do

Most entrepreneurs want two things: to keep the family together and to expand the business and family wealth to benefit future generations.

It is important that you understand the limitations of planning anything for an unknowable future. None of us can manage our affairs from 'beyond the grave'.

It is also sad but true, that siblings often drift apart from each other after their parents have died. Distance, rivalries, financial circumstances, success or failure, all contribute to this process. In the writers experience, it is important to do whatever you can to leave your estate equally between them. Start with that as your basic proposition, then consider how your assets can best be used to benefit all of them.

Valuations of companies

The best way to avoid paying too much IHT is simply to assess the value of the asset realistically. We remind you that there is no singly valid way to value a company. Valuation is highly subjective. If you think a valuer has overvalued it, obtain another valuation from someone else.

Solicitors know little about company valuations - particularly probate solicitors. Accountants tend to be better, but rarely adequate. Valuation is not something many practice accountants do regularly unless they specialise in it. If you sell any shares at all within a few years of your death, you are providing a start point valuation to HMRC. If no shares have ever changed hands it is far easier for your executors to choose a valuation method that minimises the value of the company.

Be careful with fee rates. Your executors should never, ever, agree to pay any fee except a fixed fee. Professionals are paid either by the hour or as a percentage of the valuation. A fee of £10,000 looks very reasonable for a valuation at £1 million, but rather high for a valuation of £100,000. But the difference to your estate is IHT on £900,000. If you want to win tough negotiations with HM Revenue and Customs, your executors must pay for that service as an extra.

(Another tip is never to ask for a "probate valuation". Those words make the valuer see pound signs before his eyes).

Options for your business

Now we turn to the exciting part of this article: practical options to deal with your estate. The following points are not related or given to you in any particular order. They are simply the fruit of many years as a commercial solicitor in private practice.

Sell the business now

Of course this is only practical if you are of an age when you want to lose your interest and motivation to expand it. You pay capital gains tax at a concessionary low level but your net cash, or assets you buy with it, are readily identifiable and will no doubt be subject to inheritance tax at the top rate when you die.

Give some shares to your beneficiaries now or gradually over a period

To qualify as a gift for IHT purposes, the gift must be complete. So, avoid letters telling the donees that you are still in charge. Of course what you say over Christmas lunch may be a different matter. If you can bear to part with over 50% that is best because shares which do not provide a controlling interest are worth less than shares which do.

Do not encourage your executors to sell, unless they are also beneficiaries

Again you have the problem of people with little interest in saving IHT involving themselves in an important transaction.

Give a few shares to each beneficiary now

Have them sign to a carefully drawn shareholders agreement which cannot be changed without say, 80% of the shareholders agreeing. If you retain 90% of the shares, nothing changes while you live. When you die you leave your shares equally among your spouse and three children.  But there is no argument about power and control because you have already covered all that in the shareholders agreement they have already signed. They can change it only if 80% do agree.

Write a comprehensive letter of intent to place with your will

A letter of intent does not carry any legal weight, but it is rare for executors to fail to do as you ask. Conversely it would be difficult for a beneficiary to claim he was unfairly prejudiced in some way. Such a letter is rarely used as fully as it could be. Solicitors do not like non-legal documents. But just a few examples of things relating to your business on which you could advise your executors are:

  • appointment of directors
  • appointment of independent chairman
  • rate of expansion
  • customer relations
  • export markets
  • information to be given regularly to all shareholders
  • access to critical passwords
  • control of bank accounts

Appointment of an interim chairman or director

An independent outsider as director or chief executive or as chairman of the board can be a brilliant move or a complete disaster.

If you have a trusted insider, it could be a good move to make clear to your executors that he is to replace you as chairman - maybe for a maximum term so as to enable one of your children to grow into the job.

We advise against appointment of a professional solicitor or accountant unless you have specific problems they can address.

An external entrepreneur is likely to end up making a bid for the company.

Placing the company in a discretionary trust

I turn finally to the most intriguing proposition of all: using a discretionary trust. Let me remind you immediately that income in a discretionary trust is taxed at 50% (2015/16). So you should avoid transferring into trust assets which yield high income.

The advantage of a discretionary trust is flexibility. The management of the trust is in the hands of trustees, but the management of the shares held in trust continue to be managed on a day to day basis by the directors. Yes, the trustees are in a very powerful position but your letter of intent can set out the principles on which you want them to exercise their control. You may or may not want one or more of the trustees to run the company, but we are talking here about their role as trustees of your family trust.

Examples of the areas of influence are:

  • appointment and dismissal of directors
  • directors’ pay and service contracts
  • influencing the directors on behalf of shareholders who are not directors
  • transferring shares to beneficiaries
  • approving the direction and master policy of the company

Several Net Lawman wills include a discretionary trust. Of course, there is no reason why you should not set up a discretionary trust now. It does not have to be a will trust. It would be a good idea to limit the value put into trust to a sum less than the threshold for IHT.

Further information

We recommend that you read about making sure an inheritance stays in the family next.

We believe that every adult should make a will. We provide some of our more straightforward templates (likely to be suitable for most people) absolutely free with no catches or conditions.

Just visit our library and choose the most suitable from the list of will templates. We offer nine in total that together cover thousands of possible variations of wishes. There will be one to suit your situation. If you are in doubt as to which to choose, read about which one will suit you best.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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