Estate Planning For Business Owners

Business owners, whether that be Private Limited Companies, sole traders or partners, need to give careful consideration as to how their share in the business passes when they die.

A valid Will dealing with business assets amongst other assets leaves fewer ambiguities (and hopefully none) than leaving those assets to pass under the rules of intestacy.

Whilst succession will be an obvious consideration, business owners should also be aware that there may be reliefs available to them to mitigate the tax consequences.

It is also worth noting that the documentation governing the business i.e. the partnership agreement or memorandum and articles of association, may prescribe what is to happen when someone passes away.

Succession

Business owners should consider whether they want the business assets to pass directly to a beneficiary, or whether they wish for those assets to be sold with the sale proceeds given to the beneficiary.

Consideration should also be given as to whether or not equity would be achieved by gifting business assets.

A clear plan for transfer of ownership and management, or sale thereof of assets, including the roles and responsibilities of each individual may help to facilitate the administration of your estate.

If the business is a company, then it is important to deal with any shares which may be held in the same.

Consideration should also be given to the potential tax consequences for the recipient of the gift.

Tax reliefs

If your business is farming, there are two sets of reliefs that may be available.

The first to consider is agricultural property relief. This can be applied if you are managing your assets during your lifetime, and not only upon death. The term ‘farming’ is loosely used here to mean any of the following:

• Growing crops
• Stud farms for breeding and rearing horses
• Land used for planting trees which is harvested at least every 10 years
• Land unable to be farmed due to the Habitat Scheme (as the name suggests, this is the preservation of nature and its habitats)
• Land not currently farmed due to crop rotation
• The value of milk quota associated with the land
• Some agricultural shares and securities
• Farm buildings, cottages and farmhouses

Farm equipment and machinery do not qualify for the relief, nor do derelict buildings, harvested crops, livestock and property subject to a binding contract for sale.

If your business is associated with any of the above, but the relief is not available to you for any reason, the next relief to consider is business property relief, which may also apply if your business has no ties to any of the above (for example your business is selling car parts).

Business property relief is potentially available for either 50% of the value of the assets or 100%.

As with agricultural property relief, managing assets for estate planning can be done during a person’s lifetime and not just upon death.

The relief can be claimed on property and buildings, unlisted shares and machinery.

100% relief may be available on a business or interest in a business, and shares in an unlisted company.

50% relief may be available on shares controlling more than 50% of the voting rights in a listed company, land, buildings or machinery owned and used in a business in which the owner was a partner in or controlled. If these items were used in the business but held in trust for the benefit of the business, the relief may still be available.

It should be noted that if the asset already qualifies for agricultural property relief, then business property relief cannot also be applied to the same asset.

In addition, if the asset was not used mainly for the business in the two years prior to the business owner’s death or in the two years prior to them transferring it during their lifetime, the relief will not be available. The same can also be said if the asset is not needed for future use in the business.

If, therefore, you own what could be considered as ‘business’ assets it is important that the appropriate financial and legal advice be taken, when considering estate planning.

Frequently Asked Questions

Why is estate planning important for business owners?

Estate planning ensures that your business interests pass smoothly and according to your wishes, avoids disputes, can mitigate tax liabilities, and help to maintain business continuity after your death.

What happens to my business if I die without a Will?

If you die intestate, your business assets will pass according to strict intestacy rules, which may not reflect your wishes and could create complications for partners, shareholders, or family members.

Can I leave my business to someone who isn’t involved in it?

Yes, but you should consider whether they can manage the business or whether it would be more appropriate to instruct that the business be sold and the proceeds passed to them.

Do partnership agreements or company documents override my Will?

In some cases, yes. Partnership agreements, shareholder agreements, and articles of association may set out what happens to shares or interests in a business on death and could override your Will, if not aligned.

What is Business Property Relief (BPR)?

BPR can reduce inheritance tax on certain business assets by 50% or 100%, depending on the type of asset and how it is used in the business.

Examples

Example A

The sole trader with no Will

Maria runs a successful bakery as a sole trader. She assumes her daughter will automatically inherit the business. However, she dies without a Will, and the business passes under the intestacy rules meaning her estranged husband receives the majority share. The daughter has no legal authority to run the bakery, causing the business to collapse. A simple Will could have prevented this outcome.

 Example B

The director whose shares are restricted by company articles

James owns 40% of a private limited company. His Will states that his wife should receive his shares, but the company’s Articles of Association require other shareholders to buy the shares first. His wife is surprised to receive a lump‑sum payment instead of ownership. If James had reviewed his Will alongside the company documents, he could have aligned the outcome with his intentions.