Tony Granger looks at ways to pass on an owner-managed business.
This article outlines some options open to a business owner to successfully leave the business to others. Inheritance tax (IHT) is an important consideration on death; chargeable assets above the ‘nil rate band’ of £325,000 (for 2018/19) could be subject to IHT at 40%.
Sole trader business
On death, the assets of the business are personal and fall into your estate for IHT purposes. The business could be sold as a going concern by your executors, but cash would be paid to your estate. Employees of the business could have a redundancy claim against your estate.
Consideration could be given to a double option or ‘buy and sell’ agreement with a similar business as a form of succession planning, where the parties insure each other in trust to purchase the business on death.
Partnership or LLP
An active partner’s (or limited liability partnership member’s) capital account is an integral part of the business. On death, it is treated as a business asset and potentially qualifies for IHT business property relief (BPR) – but the conditions for BPR must be satisfied. If BPR was available, no IHT would generally be payable on the value of the capital account of an individual who was an active partner in the partnership on death. Property owned by the partner and used by the business could also be eligible for BPR relief.
Losing a partner could create future cash flow problems. Consider using life assurance to cover repayment of capital accounts if possible, as well as the purchase of any property share used in the business. Alternatively, consider a small self-administered pension fund to purchase the business property to ensure continuation.
Limited company
On death, shares in a company can qualify for BPR for IHT purposes if certain conditions are satisfied.
Shares in a private company are subject to IHT. However, BPR is a very valuable relief, which can enable the shares to be transferred on death or during lifetime free of IHT.
BPR qualifying conditions
To benefit from BPR in the case of shares in an owner-managed or family company:
- the shares generally need to have been owned for at least two years;
- the company must broadly carry on a trading business as opposed to an investment business. BPR is not generally available if the company wholly or mainly deals in securities, stocks or shares, land or buildings, or makes or holds investments;
- a holding company with trading subsidiaries can qualify for BPR;
- some assets will not qualify for BPR – if not used wholly or mainly for the business during the last two years, nor required for future business use. Included here are high levels of cash;
- where shares are subject to a binding sale contract, no BPR is available. It is important to make sure that any shareholders’ agreement, providing for shareholders to purchase the shares of a deceased shareholder, does not result in a binding contract and the loss of BPR.
Practical Tips:
If a company will be operating both a trading business and an investment business, BPR can be put at risk. In that case, consideration should be given to separating the businesses.
Avoid leaving shares to a spouse or children without proper planning. Does the company declare dividends, or are the shares a minority holding? Shares could be left to a family trust to benefit spouse and children, etc. On the death of the surviving spouse, shares or cash will be free of IHT as they are in trust (although the trust will generally be subject to IHT). Alternatively, use a ‘double option’ agreement between shareholders with life cover in trust to create cash to purchase shares on death. This is a contract post-death and not subject to IHT (as opposed to a ‘buy and sell’ agreement, which is a contract pre-death where you could lose the BPR).
Note that a director’s loan account is not covered by BPR and could be subject to IHT.
It is important to have succession planning strategies in place. Decide where your shares will go on death – either to family or other shareholders. Proper planning could save your estate significant amounts of IHT.
