Inheritance and succession advice for family business owners

Do you intend to sell your business in your lifetime? If so, you need to decide what is to happen to the proceeds. Are you planning to distribute the proceeds, on receipt, to your family? There may be inheritance tax advantages in making gifts of shares to your family while inheritance tax Business Property Relief (BPR) is available. If you are planning to make lifetime gifts of your shares, you need to carefully consider the effect the gifts will have on capital gains tax Business Asset Disposal Relief.

If you plan to pass the business to the next generation, then you still need to consider if the shares will pass in your lifetime or by a gift under your Will.  If you are considering a lifetime gift then normally, if you are dealing with a trading company, the gift can be made without an immediate tax charge, but a lifetime gift will mean that the shares are not rebased on your death for capital gains tax purposes.  This could be important if the shares are currently worth substantially more than when you acquired them.  If you die owning the shares, then any capital gain which has accrued on them, while you have owned them, will be wiped out on your death and the beneficiaries of your Will will inherit the shares, for capital gains tax purposes, at their probate value on your death.

Whether you are considering a gift in your lifetime or on your death, you need to consider whether you wish to make an outright gift or a gift via a trust.  Tax considerations aside, direct gifts can be risky if the recipient subsequently divorces, becomes a bankrupt or is just profligate.  If a direct gift is made in these situations, they can lose some, if not all, of the value of the underlying capital of the gift.  A trust, on the other hand, can protect the underlying capital for the beneficiary and his or her descendants.

The other advantages of a trust are that:

If you are considering gifting shares on your death, then we would always recommend that you consider having a business trust in your Will.  A business trust is a discretionary trust which has the effect of crystalising inheritance tax Business Property Relief on your death.  BPR is generally available on shares in a private trading company which you have owned for two years before your death.  It is a valuable relief as – providing you have not place non trading assets in the company or you do not have excessive cash balances on your balance sheet – the whole value of your shares should not be subject to inheritance tax.  A business trust will ensure that the shares will be ring-fenced in a favourable tax environment after your death.  A business trust will be particularly helpful if you have a cross option arrangement with your business partners, ensuring that cash distributions from the trust can be made inheritance tax free (in a ten-year period after your death).

An important point to remember about BPR is it is lost if the shares are subject to a binding contract of sale on your death.  Consequently, when you are seeking advice about gifts in your Will, you should check the articles of association for your company and any shareholders’ agreement to ensure that any pre-emption rights are couched as “put and call” options so there is no binding contract for sale and BPR is lost.  While reviewing the articles of association, it is also sensible to check the transmission rights for the shares, to ensure that the directors of the company cannot block any share transfers pursuant to your Will on your death and thereby defeat the terms of your Will.

If you have any questions regarding family business inheritance, please contact Amanda Simmonds in our Family Business team.