Our Private Client team explains the importance of succession planning for business owners.
For business owners, there is more to future planning than just writing a will. Devising a strategy for how your business will continue to operate upon your death will ensure that you, your family and staff can be confident that things can carry on as you wish.
Succession planning enables you to carefully consider the future of your business, and who you trust to carry on its legacy once you are gone. Allocating your assets to the right people at the right time will be key in a smooth transition, meaning there is one less concern for those left behind.
As a business owner, there may also be inheritance tax exemptions available. Plus, your loved ones may be eligible for tax relief on assets, whether they are passed on in your lifetime or left in your will.
Working with an experienced solicitor with the relevant expertise to protect your business and indeed the future of it is highly advised. Doing so will leave you to do what you do best; running your business.
Why do you need succession planning?
We often find that business owners are incredibly committed, busy entrepreneurs who have spent most of their working lives building and growing their business. Your business becomes an incredibly valuable asset with lots of personal connections and precious memories attached to it.
Unfortunately, as business owners are, rightly so, very busy in running their company, there is often little time to think about what will happen to the business if they lose capacity or if they die.
What is succession planning?
Generally speaking, succession planning encompasses the plans that must be put into place for a business to continue running properly when the current owner loses capacity or dies.
Within this, there are a variety of things to consider, some straightforward, others requiring more thought.
- Would the business be able to continue to operate in a worst-case scenario?
- If the owner either lost capacity or died, what would happen to their family?
- If they have a business partner, what would happen to them; would they be able to take control of the business?
When it comes to succession, there are a lot of ifs and buts. This is why it helps to plan in advance, ensuring that all interested parties are on the same page. Not only will it help things to run efficiently even when grieving, but it will reduce the risk of heartache and hassle further down the line.
Doing so can make sure that the family and the business partners suffer as little as possible and the business doesn’t suffer either. The last thing anybody involved would want is for the business to fall apart as well as losing the person who worked so hard to build it. There are likely also employees and other colleagues who will be impacted emotionally by the loss, especially in SMEs, but having the stability of job security will help them to carry on.
Inheritance tax
Some business owners will fall within the threshold for inheritance tax. When they come to pass it on, what are the inheritance tax reliefs that can potentially mitigate against the large tax bill?
A nil-rate band allowance means that up to a certain estate value, no tax will need to be paid on money or assets that are passed on to a direct descendant. For married couples, provided one of them survives, they will be able to leave assets up to £1 million, tax-free, to direct descendants.
Importantly for business owners, while the business is trading, it may get the benefit of business relief from inheritance tax which is either a 50% or 100% exemption.
One problem, however, is when the business passes to a spouse. For example, there will be no tax to pay because of spouse relief anyway. But, if after the death of the business owner, the business is then sold, or if for any reason the business loses the relief, what was once exempt from inheritance tax is then converted into cash. At this stage, the cash would be subject to inheritance tax on the death of the surviving spouse.
The above factors are all considered in formal succession planning. As you can see, there are complexities and knock-on effects of decisions. To make sure you get everything right, it’s worth speaking to an inheritance tax advisor.
A deep dive into the business
We will ensure that proper rules are in place to try and get the benefit of this relief where it is available.
Undertaking a thorough deep dive into the business owner’s affairs and the make-up of the business will help us to advise on the right pathways to go down.
The more we know and understand about your business, how it is run and managed and its plans for the future as well as the owner’s personal and financial circumstances, the better we can support with succession planning.
Open and trusted communication between solicitor and business owner will ensure that all aspects of future planning are covered and managed effectively.
Including accountants and financial advisors in your succession planning with a solicitor will ensure everyone is up to date with what the plans are. By working together, there is clarity and deep understanding of how the business operates and the assets it has.
More than just will writing
We often talk about the importance of making a will and the lack of understanding and knowledge that is out there. For business owners, yes, a will is important, but succession planning remains just as vital.
With a will, you need to focus on which of your loved ones or trusted causes your assets will be passed onto. With succession planning, there are likely other people to consider such as shareholders and co-directors who may want to know what will happen to your shares. Will the family sell them or keep them, and other similar questions will be asked. What if the shareholders want to buy shares back but the family don’t want to sell them?
For circumstances like this, it helps to have documents in place that give both parties a sense of certainty on what will happen with the business.
Something our team works closely with the corporate team on is Cross Option Agreements. This essentially lays out what will happen to a person’s shares in the event of their death. Very often, life insurance policies will be taken out on the life of the shareholders, so on the death of a shareholder, the life policy will payout to the surviving shareholders, giving them the cash to buy the shares.
If it is a family-owned business, you could consider a family charter, which is a non-binding agreement but lays out plans.
No time like the present
Many business owners might think that on the face of it, succession planning requires a lot of time and a lot of work that they don’t necessarily have day to day. For that reason, conversations around it will often end up at the bottom of their to-do list.
In reality, it is one of those things that unfortunately are inevitable. It’s going to happen at some point, so why not take the time while you are well and able to get plans put in place, then get on with enjoying running your business.
Most of the time, the process isn’t as time-consuming or as painful as expected. It’s something that has to be done, and once sorted, you have complete peace of mind. Plus, if things do change within the business, you can tweak your plans to reflect the changes; you won’t have to start from scratch.
Contact us for succession planning support
Our legal experts are here to support you through the process. We offer a free initial meeting to help start the conversation and prompt questions to enable you to think about what you may not have previously considered. Once you have a better idea of everything, we can come together to evolve a strategy that works for you and your business.
Remember, starting sooner rather than later is always the best idea. This will help you to have time to gather all the information you need to get everything planned and put into place.
Contact us on 0161 969 3131 or fill in our contact form and one of our succession planning solicitors will be in touch.