Legal Guidance for Succession planning for Family and Owner Managed Businesses

American Benjamin Franklin famously said "in this world nothing can be said to be certain, except death and taxes". Sadly, whilst not a statistical "certainty" we can now also include in this the fact that with our ever-aging population the loss of mental capacity due to progressive conditions such as dementia is becoming increasingly common. Despite this, with the many financial, operational and regulatory pressures facing family and owner managed businesses on a day to day basis, planning for the incapacity or death of a business owner (and the adverse tax consequences that may follow) is often neglected.? However, by ensuring that the preparation of a well thought out Will and the implementation of a business Lasting Power of Attorney (LPA) forms part of all succession planning for business owners, the adverse consequences and threat to the on-going success of the business for failing to address such matters can be avoided.

There are a number of factors that business owners need to address when preparing their Will, including:

Identify the assets within the business and how these are owned. Whilst this may seem obvious, there may be a number of reasons why, for example, freehold property is owned by the business owners personally (so does not form part of the balance sheet) but is then used and occupied by the business.

In such circumstances a gift of "my Shares in ABC Ltd" would not include the individual's freehold property which may then pass under the residue of the estate to different beneficiaries - potentially creating tensions and operational difficulties going forwards. Assets owned outside of the business, but used by the business, also qualify for a lower rate of Inheritance Tax ("IHT") Business Property Relief ("BPR") on the death of the owner so it is important to assess this when calculating overall IHT exposure to consider if steps can be taken to mitigate the liability during the owner's lifetime.

Who do you want to benefit? Where there is a surviving spouse and children it is important to give full consideration to the competing interests of all family members particularly if, for example, there is one child who is heavily involved in the business and who is ear-marked as the successor. An out of date Will simply leaving the whole estate to the surviving spouse and then on the second death "equally between my children" could result in the break-up of the business or costly and time consuming litigation with claims being made against the Estate.

This could be avoided with a properly thought out Will which specifically addresses both how the business is to pass on death and to whom. It also allows an opportunity to provide for beneficiaries who are not involved in the business by leaving them the non-business assets/property under the Will.

Would a Will trust be appropriate? Life Interest trusts or Discretionary trusts incorporated into Wills can provide a very useful way to benefit various family members by offering flexibility whilst still preserving the business for future generations. This is particularly the case if there are concerns about a child inheriting at a young age or future marriages/divorces dissipating the business away from the family.

Ensure the Will is tax efficient. Leaving assets to a spouse will ensure that such assets pass free of IHT (benefitting from spouse relief). However such a Will would fail to utilise the very attractive BPR available to business owners on death at 100% (providing all qualifying conditions are met) which may not be available at a later date (for example if the nature of the business or legislation changes).

Wills can be drafted to provide for all assets qualifying for BPR to pass, for example, into a discretionary trust (from which the spouse and children can benefit) thereby crystallising this valuable relief at the earliest opportunity.

Is an insurance-backed cross-option agreement needed? A shareholder will want to ensure that his or her family can benefit from and inherit the value in the business owned by them. However, the interests of the deceased shareholder's family may not align with the remaining shareholders and whether the continuing shareholders can access sufficient funds to buy out the deceased's shares is often an issue. In such instances a cross-option agreement backed by life insurance is a solution that can ensure the remaining shareholders can quickly access sufficient cash to buy out the deceased's shares with the deceased shareholder's family benefitting from a monetary sum equivalent to the value of the shares. If structured properly such an arrangement can also ensure that the shares qualify for BPR with the proceeds of the life policy falling outside the estate and not subject to IHT.

In addition to putting in place a Will, it is also vitally important to make appropriate provision in the event that a business owner loses mental capacity and is unable to make day to day decisions in relation to the running of the business. A LPA (property & financial affairs) allows an individual to name one or more people to act as their Attorneys to make decisions in relation to property and financial matters (including business interests) in the event that you lose mental capacity (there is also a separate LPA - a LPA (health & welfare) - dealing with health matters). The failure to put in place a LPA could result in family members having to make an application to the Court of Protection for a Deputyship Order so as to be able to run the business with such applications often taking 6 to 9 months and which can cost several thousands of pounds. In the meantime, the business could be brought to a standstill if day-to-day decisions cannot be made or actioned.

A LPA is very powerful document and therefore careful consideration needs to be given to the identity of the Attorneys. It is possible to put in place a LPA (property & financial affairs) dealing with your personal financial and property matters and a separate LPA (property & financial affairs) dealing with your business financial and property matters. This is useful as it can enable you to name different individuals to undertake the different tasks. In particular, in relation to the running of a business consideration should be given to the suitability of the chosen Attorney ensuring that they have the appropriate skills, characteristics and attributes to act for you in running the business.

Succession planning involves a number of different factors and should always be undertaken in good time and in consultation with your solicitor, accountant and financial advisor to ensure the best result for the business and your family.

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