Thinking about how and who you should leave your business to is a difficult question for any business owner to address. However, ensuring that you have a plan in place for your business after your death is extremely important.
You may plan for your children to be your successor, or you might want your spouse to take your share of the business.
In this blog, we will discuss will writing and estate planning for business owners, so you know which points to consider before making any decisions.
Can I leave my business in my Will?
Like most assets, it is possible to leave a business in a Will. This depends on how the business is set up and your position at the company.
If you run your own business, therefore making you either a sole trader or sole director, you can pass on your company through a written Will.
If you’re one of many partners or shareholders in a partnership or a limited company, you won’t be able to pass on the entire company, but you can pass on your share of it. However, you might need to also consider other people’s wishes as to who they want to co-own the business with after your death.
Well-drawn shareholders’ and partnership agreements will have a thorough and practical exit strategy in place. If this exists, we advise that you check them carefully. If you are bound by an agreement you’re not happy with, contact the other owners and see what changes can be made.
For more information, read more about how to create a successful exit strategy.
Succession planning
Beneficiaries can include your children, spouse, siblings, parents and other relatives. Whoever the beneficiaries may be, your choice will depend on the personal circumstances of each one. For example, equality for your children is fine in principle, but what if one of them suffers a severe injury, has a divorce, has more children or has another business of their own?
In essence, you must address these questions:
1) Who would you want to benefit from your share of the business, and /or who will continue to run the business?
Only you can assess the suitability of your family to manage your business. This assessment will dictate the decisions you make in your Will.
It’s also important to consider the limitations of planning for the unknowable future, and none of us can manage affairs from beyond the grave.
Siblings may drift apart from each other when their parents have died, but also rivalries, financial circumstances, and other successes and failures can contribute to this process.
2) Do you pay inheritance tax on an inherited business?
Your beneficiary may have to pay inheritance tax when inheriting your business if your estate is taxable.
There are ways to reduce the amount of tax payable, and beneficiaries may be able to claim relief.
Business Relief (BPR) is an exemption to inheritance tax.
You can see the relief qualifying criteria on the gov.uk website: https://www.gov.uk/business-relief-inheritance-tax/what-qualifies-for-business-relief
For a business to get BPR, it must not consist wholly or mainly of the following prohibited activities:
- dealing in securities, stocks or shares;
- dealing in land or buildings, or
- making or holding investments.
In deciding whether a business consists “wholly or mainly” of one or more of these prohibited activities, HMRC will look at the business in the round, taking into account all of its activities both at the date of the transfer (which could be at the date of death) and over a reasonable period of time before the transfer (which may be several years), to see if one or more prohibited activities predominate.
Valuations of Companies
If your business doesn’t qualify for 100% of the Business Property Relief (BPR) tax relief, an alternative to mitigate inheritance tax is to assess its value. It is important to note that there is no singular way to value a company, as doing so is highly subjective and requires professional judgement.
The best option to value a company will depend on multiple factors, including why you need a valuation.
Option 1 – Price-to-Earnings Ratio:
One of the primary ways to reach a value is to look at your profits. A price-to-earnings ratio (P/E ratio) does this by multiplying your earnings (after tax) to arrive at a value figure. For instance, if you use a ratio of four and make £500,000 post-tax, the business is worth £2 million. However, this method can be complicated as there isn’t a fixed ratio to apply. The appropriate multiple can vary widely depending on industry standards, growth potential, and market conditions. It is crucial to consult with professional valuation experts who can justify the chosen multiple based on comparable companies and relevant factors.
Option 2 – Basing a Business Valuation on Industry Sales:
Another method is to look at standardised industry rules of thumb. However, this approach involves significant judgment and subjectivity, so it is strongly recommended to seek professional valuation advice before making any decisions. By comparing your business with similar businesses in the same industry with comparable turnover, customer base, and profit rates, you can derive a valuation based on industry standards. Professional valuation experts can provide a more accurate and reliable assessment using this method.
Option 3 – Entry Cost Company Calculations:
The third option is to calculate the entry cost—how much it would take another start-up company to reach your current trading levels. This calculation should include everything you have invested in your business to reach your current position, including:
- Start-up costs
- Assets
- Product development
- Marketing
- Employee training
Additionally, it is important to account for the depreciation of assets and the time value of money to ensure an accurate and realistic valuation. This method provides a snapshot of your business’s value at a specific moment by calculating the cost of creating a similar business from scratch.
We strongly believe that every adult should make a Will, especially if they own or share a business. It is essential that you follow the process of instructing a solicitor who can ensure that your best wishes are represented and that the Will has been drafted correctly in accordance with your instructions.
At Slater Heelis, we have a specialist team of wills & probate solicitors and corporate commercial lawyers who will ensure the best for your company and your potential beneficiaries.
If you would like to speak to a member of our team or ask any questions, please don’t hesitate to call 0330 111 3131 or use our online booking form.