The thought of arranging for a time when you won’t be here can be an uncomfortable one. Nobody likes to think about death, however, along with taxes, it’s one of the only certainties on which we can rely. One of the questions business owners will ask themselves is what will happen to their companies, after they’re gone. After all, many business owners will have spent years investing their hard-earned time, energy and money into their ventures, and they want to make sure their legacy is secured.
Fortunately, when it comes to passing your business on to the next generation, there are many different options available.
Sole Trader
Those who run their businesses as sole traders will face a fairly straightforward choice. When a sole trader dies, their business basically ceases to exist as the individual and company are seen as the same entity. This can be particularly detrimental if the business has employees or outstanding debts that need to be paid.
It’s therefore important to put in place a plan as to what will happen to your business, after you’ve died. You may be able to ensure that the business can be run by the executor, assuming you have outlined this in a will, however this isn’t always guaranteed. Most sole traders will choose one of two options, either sell off any assets and gift this capital to a friend or family member or convert their business to a limited company or partnership, in order to guarantee it’s continuation.
Limited Company
Limited companies are categorised as their own legal entity and therefore when it comes to the death of a shareholder, what happens next can be more complicated. Again, a will sets out what will happen to the shares within the company. This will include either leaving shares to friends and/or family members and therefore giving them a stake in the company or selling these shares and leaving cash directly.
You can also choose to gift shares to your children while you’re still alive. As this is classed as a gift, your children won’t be liable for inheritance tax but only if the gift is made at least seven years before your death.
However an individual chooses to approach the legacy of their limited company, an agreement must be made ahead of time. This means working with fellow shareholders in order to create a legal agreement and/or Articles of Association.
Partnerships
Arguably, the business type that can be most affected by the death of a participant is a partnership. Without a thorough partnership agreement, the death of one or both of the partners in question will cause the business to dissolve. Leading to assets being split between existing partners and the estate of the partner who has died. Fortunately, you can protect against this eventually by ensuring you have set out exactly what you’d like to happen, in an official partnership agreement. This will involve the decision between the taking over of the partnership by a family member or friend or the selling of half of the business and distribution of the assets.
Business Relief
It’s worth noting that business relief is applicable to inheritance tax, when it comes to specific circumstances. For example, a business owner can give away property and assets of the business, as gift. The recipient must keep them as long as the business owner is still alive, in order to avoid paying inheritance tax on these assets. However, there are caveats to keep in mind, for example the donor must have owned the business for at least two years, before gifting any assets.
In terms of what is eligible for business relief, these include lands, buildings, machinery and shares.
When it comes to securing your legacy, the urge to get everything right is understandable but the process can be complicated. Fortunately, there is expert help available. Salhan Accountants have the experience and expertise in providing a wide range of financial solutions, including guidance on the many issues facing business inheritance.
