Business owners invest a great deal of blood, sweat and tears in building the family business. It’s an environment which often cultivates a “business first” culture. What is often neglected is the careful planning for the continuity of the business at the key stages in the business lifecycle, including the death or incapacity of the family business owners. Here are Murray Beith Murray’s tips for taking care of the bigger picture.
- Succession Plan – business families need a clear succession plan for the future ownership and management of the business. This should be reflected in your Will. Best practice is to consult your family and involve them in your planning, so that there are “no surprises” when the Will is triggered on the death of a business owner. To know the plan and your reasoning behind it may go a long way to avoiding family strife following your death.
- Articles of Association – it is important that the solicitors dealing with your personal affairs understand the mechanics of the company’s Articles of Association or any shareholders agreement that governs what happens to the family shareholding. Why? There may be corporate mechanisms (pre-emption rights is one example) which dictate what happens to your family shareholding in the event of death or incapacity, or even divorce. Difficulties might arise if your Will contradicts the provisions contained in the company’s Articles of Association or shareholders agreement.
- Fairness among children – While most people wish to treat their children equally, this can be hard to achieve when a business is involved. “Equal” does not, in every case, mean the same as what everyone might consider to be “fair”. If some children are involved in your business (either as employees or shareholders), while others are not, you will need to consider how this will impact the division of your estate.
- Legal rights – Under Scots Law, children and surviving spouses are entitled to claim a portion of the business owner’s ‘moveable’ estate on death, regardless of what is included in his or her Will. Shares in a family business are included when calculating a legal rights claim. So if, for example, on the death of the business owner, the family shareholding is being left to one sibling, but not another, the disinherited sibling could make a legal rights claim. The claim would need to be satisfied by the deceased’s executors, in cash, and might necessitate the sale of business or other assets. The impact of this should always be considered when a business owner’s Will is prepared.
- Structure – Inheritance Tax relief is available at the rate of either 50% or 100% on trading business interests, depending on the way the business assets are held. This relief is known as Business Property Relief. As Inheritance Tax is charged at the rate of 40%, the application of business property relief can result in significant Inheritance Tax savings. Sometimes steps can be taken to mitigate against the impact of losing the relief (which would happen, for example, following the sale of the business or in the event that the tax rules change and the relief is withdrawn, or if the business no longer qualifies for the relief).
All this means that there are significant opportunities to plan for the continuity of the business and the protection of wealth generated by the family business. Murray Beith Murray advise family business clients on this, and recommend a joined up approach with your other professional advisors to make sure that any planning is suitable in every case.
Contact our Family Business Lawyers, Edinburgh
Murray Beith Murray Partner, Peter Shand, is an experienced family business lawyer and authoritative voice on delivering bespoke and integrated advice to business families. If this blog has raised any questions, or you have a family business matter that you need advice on, contact Peter today using the Enquiry Form or call on 0131 225 1200.
