It is easy to assume that if your business is a success, personal and financial security will follow. However, at this stage it is worth considering how you would fare if disaster struck (for example on premature death, during serious illness, prolonged absence or unexpected loss of mental capacity). Additionally, without putting foundations in place now, you may be unable to take advantage of the various tax saving opportunities that are specifically available to entrepreneurs. You may also leave your loved ones with unhelpful default arrangements which are difficult and costly to unravel.
Business is all about managing risk. When preparing your business plan you may well have carried out a SWOT analysis and identified the main risks facing your business. For instance, you may have considered what would happen if you or another key employee suffered a stroke or had an accident which would prevent them from working. At this stage it is worth thinking about:
- Key Man insurance and business protection
- Specific provisions in your Articles and shareholder or partnership agreement setting out who may act in the event that a director has died or lost capacity or how a deceased's family may extract the value or benefit from their share in the business.
- If you have an employee who is "irreplaceable" consider how the business could continue should they be unable to work
- You may also want to consider to whom you would like to pass on your share of the business
Such planning should not be limited to your business alone; you should also manage personal risks. If you have left a larger organisation to start up on your own then you may well have lost some of the employee benefits such as life cover, death in service benefit and pension plans and it is worth taking a moment to review your own affairs, ideally with your financial adviser. By addressing these issues now you can ensure that you are ready should the unexpected happen.
Why should I have a Will? - Key Reasons
Without a Will your property and business interests will be distributed in accordance with the laws of intestacy which means you do not have a say over who receives your assets. If you do not have a Will it is likely to be more costly for your family to subsequently take advantage of various tax saving opportunities.
Without a Will your Husband, Wife or Civil Partner is not automatically entitled to the whole of your estate. If you do have a Will, but your personal or financial circumstances have changed you may need to review the terms. For example, unless it was specifically drafted in contemplation of your marriage or civil partnership, then your Will will be revoked on "tying the knot".
If you are unmarried and you do not have a Will then your co-habitee or partner, if you have one, has no automatic right to receive any of your assets, their only option may be to make an application to Court.
If you have children under the age of 18 it is important that you consider who might take care of them. A child’s surviving parent continues to have parental responsibility, but if both parents die without appointing guardians, it is for the Court to decide who should look after them. In a worst case scenario, they may be brought up by people that you would not have necessarily chosen. Any uncertainty, coming at such a difficult time, could also be compounded by conflicting preferences across the wider family.
By having a Will you can also specify who should receive your share in your business. You may want to identify key contacts who your family should consult when considering how to deal with your business interests. Without a Will you may also leave additional problems for your business partners particularly if your voting rights are fragmented or your share is left under the rules of intestacy.
A Will can also reduce any potential Inheritance Tax bill...
Without making specific provisions for your business interests in a Will you may miss out on taking advantage of generous inheritance tax reliefs. If you are domiciled in England then UK Inheritance Tax will be payable on your worldwide assets, over the nil rate band threshold (currently £325,000). UK Inheritance Tax is payable at 40% on any amount over this threshold subject to various exemptions and reliefs. Your business interests, any properties held together with cash, investments and personal belongings (such as jewellery, cars and art works) all form part of this taxable estate. Any assets that are left to your Husband or Wife pass free of Inheritance Tax.
Broadly speaking, Business Property Relief ("BPR") is potentially a very useful relief from Inheritance Tax. It was originally introduced to prevent family members having to sell a business in order to pay the Inheritance Tax bill. It is available to save Inheritance Tax on trading business assets, provided that they are not dealing “wholly or mainly” in investments or land. If BPR is available you could pass a substantial share of your estate onto the next generation without paying Inheritance Tax. However, if the relief is claimed but then the business interests are sold shortly thereafter there may be scope for HMRC to "claw back" the Inheritance Tax due.
BPR can also be used to make tax efficient lifetime gifts to partners or children and to set up lifetime trusts although there are a number of traps to bear in mind.
Your company structure is important in determining the availability and extent of BPR for example a limited company as a whole may still qualify for BPR despite holding some land or investments (ie assets not normally eligible). It is worth considering the balance of assets and operations within any group structure as this may determine whether a holding company or indeed an entire group is eligible for BPR.
Lifetime disasters – Lasting Powers of Attorney and Corporate Governance Planning
Unless all your assets are held in joint names, if you had a horrible accident or illness and lost the ability to manage your own affairs your bank accounts and assets would be effectively frozen until the Court appointed a "Deputy" to act on your behalf. By putting in place a LPA for Property and Financial Affairs, you could avoid the expense and delay of your family having to apply to court and you can choose who you would like to act on your behalf in relation to your personal finances.
A Property LPA does not give your attorney authority to make parental decisions or to take on any professional roles or positions of office that you might hold. Crucially for an entrepreneur your Property LPA would not enable your attorney to act in your capacity as a shareholder or director of your company. It is therefore vital that your Company's Articles and Partnership Agreement or Shareholders Agreement deal with this scenario. This is especially true where an entrepreneur is both sole shareholder and director as there is a risk that the Company will be left "in limbo".
You may also want to consider putting a Lasting Power of Attorney for Health and Welfare in place. Without a Welfare LPA (and in some cases a Living Will/Advance Decision) if you are unable to make decisions for yourself about your care and medical treatment the doctors will consult your next of kin but ultimately your medical team will have the final say. Your co-habitee or partner may not be treated as next of kin, and thus you may want to consider appointing them as your attorney under a Welfare LPA.
Lifetime Planning – how do I maximise the reliefs?
The important point to remember is that you cannot plan your business and personal affairs in isolation. It is important to manage any risks that overlap. There are specific tax reliefs available to entrepreneurs during their lifetime as well as on death and you should regularly review your personal affairs and company ownership structure as your personal circumstances and business interests develop. For example it is worth keeping an eye on the requirements for CGT Entrepreneurs Relief should you be in a position to use it when selling or passing on your business interests in the future.
Entrepreneurs' relief is useful when selling or restructuring your business. It can reduce the potential capital gains tax bill on lifetime gains up to £10 million per business owner from 28% to a much lower rate of 10%. Given the complexity of the provisions it is helpful to keep the general criteria in mind so that you do not miss out on any available reliefs. Entrepreneur's relief is more relevant when selling or exiting your business, but it is impossible to take advantage of the relief unless you have put the foundations in place beforehand. Timing is integral in assessing your eligibility for such reliefs and if adjustments need to be made you will need to know about these in advance of any sale agreement.
How can we help?
Farrer & Co can help you to stay on top of the various issues that confront your business from its creation to the time you decide to exit, so as to ensure your time is spent where it should be – on your business.
We can advise on setting up, developing and growing businesses, as well as bringing in external funding and maintaining control for the next generation, all done in the most tax-efficient way possible.
The needs of our clients span a number of areas – private client, corporate, family, philanthropy, financial services, disputes, residential and commercial property – and we are one of only a few firms able to offer genuinely market leading expertise in all of these areas – all under one roof and all readily available to collaborate to achieve a rapid solution.
Whilst we can provide you with initial business start up advice or on specific issues and projects as and when they arise, we can also tailor a legal coaching framework for your business which allows you to:
· put in place good business practices and governance procedures that will keep pace with the growth of your business;
· develop processes to drive your business forward whilst allowing the management team to focus on running the business;
· manage risk in the business to maximise value;
· identify and resolve issues to ensure a smooth path to the next stage of growth or to an exit;
· give investors confidence in the fundraising, growth and sale potential of your business; and
· establish tax efficient personal wealth planning solutions for you and your family.
This note is intended as a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2012
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