Nobody will be in business forever and it is a sensible person who plans their exit strategy advises Nick Richardson, Partner at rhw solicitors LLP in Guildford, Surrey.
Your business exit may come about in one of the following ways:
- You decide to sell your business,
- You sell your share in the business,
- You become critically ill and decide to sell,
- You die and your share is either sold or passed on,
- You are removed by business colleagues,
- You become mentally incapable of running the business and contributing to it.
Whatever happens you should spend some time trying to make sure that you understand the issues and the likely consequences for you and your business and prepare for them with a Commercial Will.
In the event of the death of a sole trader, the Personal Representatives (PRs) of the estate would take over and ultimately sell the business as a going concern. The PRs will either be the Executors named in the Will or, if there is no Will, those entitled to act as PRs under the intestacy rules. Competing interests of beneficiaries under a Will or under the intestacy rules may result in the PRs having to sell the business as soon as possible, especially if there is mounting pressure from beneficiaries to ‘cash in’ the assets in the estate.
In a Partnership, lifetime succession planning in respect of partnerships can be crucial to ensure the surviving partners can effectively carry on with the business.
If there is no partnership agreement in place the partnership may simply dissolve on the death of a partner. A partnership agreement can give the surviving partners the ability purchase a deceased partner’s share from the PRs of the estate. The partnership agreement ought to be carefully drafted so as not to create a binding agreement to sell in the event of death, which could have adverse Inheritance Tax consequences.
Certain business interests qualify for Business Property Relief (BPR) from Inheritance Tax on death. For instance, a partnership interest in a trading company owned for two years before death ought to qualify for 100% relief such that the value of the interest is reduced to nil for Inheritance Tax purposes.
It is quite common in circumstances in which a person is married or in a civil partnership that they simply leave all of their estate to their surviving spouse or civil partner in the event of death. If the estate contains business interests this could be wasting the Business Property Relief, however, as assets passing to a spouse or civil partner are exempt from Inheritance Tax anyway.
It may be more tax efficient in the long run to leave the business interests into a trust as an alternative to all the estate passing outright to a surviving spouse or civil partner. The surviving spouse or civil partner can still benefit from the trust during their lifetime but without the underlying value of the trust fund then being included in their own estate in the event of their later death.
Whatever your circumstances, don’t leave it until it is too late. As you would with a personal will, you need to start planning now for whatever the future may bring.
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