He adds: “For some of the smaller companies we deal with, the business would likely wind down upon the owners death as they were the sole earner, so there isn’t much value to the remaining business.
“We do have a couple of businesses with two or three owners where we set up shareholder protection, which will pay out a lump sum in the event of one of the shareholder's deaths. But unless there is a legal agreement in place, this often won’t protect against some of the issues a death raises.”
For larger businesses or those with a definite capability to continue trading after a key shareholder has died, there are a variety of approaches that can be taken, including appointing the correct management team to move the business forward, or for the business as a whole to be sold to a third party.
Walford-Fitzgerald adds: “Some, especially jointly owned businesses, have more sophisticated mechanisms to allow the continuing partners or shareholders to buy out the deceased’s interest. There are often life policies in place to fund this. However, we would urge businesses to ensure careful planning here because poorly structured arrangements can result in inheritance tax being payable.”
Using shareholder agreements
If a business is not being left to the surviving spouse, then shareholder agreements should be put in place, says Walford-Fitzgerald. But if there are other assets outside of the business to be left to family while the business will continue to be owned by others, then it is vital to consider the various ways you can use business property relief to minimise IHT obligations.
Walford-Fitzgerald adds: “For example if you would like to leave your cash to your daughter and the IHT-exempt business to your widow, then, subject to values, you would leave them the other way around and the daughter would sell the shares to the widow or widower. The daughter would not pay IHT on the shares – but would have on the cash – and the widow or widower’s legacy is exempt anyway. Two years later, the shares are exempt from IHT again, so there is no liability on them when the widow or widower passes away (assuming he or she survives their spouse by two years or more).”
While a letter of wishes can be left to outline how the entrepreneur wanted the business to continue running, this is not legally binding, and any such wishes would need to be considered in light of economic conditions. So, it is vital to discuss succession plans not just with your family, but also business partners and the business management, says Butcher.
