Succession planning
Owning a successful business can present an inheritance headache both for the business owner and their professional advisors.
If the owner intends to pass the business down the family line, the common questions usually raised are “Who would be the right person to inherit my business” and “How can I balance the competing interests of all my children?”. Even if the answer to the first question is easy, the second question can be more difficult to resolve if the bulk of the owner’s assets are comprised within the business. Problems then arise in achieving a measure of equality or in managing the personal and financial expectations of all children.
Inheritance Tax is another factor which can present difficulties, particularly if a significant Inheritance Tax bill arises and there are little available liquid funds to pay the tax. If this problem is not considered in advance, assets of the business may have to be sold following death which could affect the future profitability or viability of the business.
If there is no likelihood of passing the business down the family line, and it is instead likely that a business partner or co-shareholder would want to carry on the business, a common problem in this scenario is “How can I convert the value which I have built up within the business into cash for my spouse and children to benefit from?”. This will present particular difficulty if the business partner or co-shareholder is not likely to have the cash resources to affect a buyout of the shares or interest inherited by the family members.
In order to achieve a satisfactory resolution to these problems, advance planning is essential. The most important starting point is to:
Review any existing Wills and business agreements (i.e. partnership agreements, shareholders’ agreements) to consider whether they adequately deal with what happens on your death and to ensure that there is no conflict between the legal documentation.
Consider how business assets are owned (whether they are owned within the business or owned personally outside of the business). Consideration can then be given as to whether this ownership structure offers the best means of minimising Inheritance Tax and/or provides sufficient flexibility to allow family members to financially benefit from either the assets or the business itself.
Consider whether insurance arrangements would be appropriate either to fund any potential Inheritance Tax bill or to enable family members to extract value from the business shortly after death.
Obtaining professional advice on all of these arrangements at an early stage can remove the stress for your next of kin, reduce the potential tax burden and allow for a smooth transition for the surviving business owners to enable them to continue to drive the business forward.
For further advice on this topic, please contact Gavin Birchall, Senior Associate at Birketts.
This article provides only a general summary and is not intended to be comprehensive. Specific legal advice should be taken in any individual application. Law covered as at 1 August 2011. © Birketts LLP 2011.
