Connecting North West business to relevant training, insight, conversation and each other
What is a company will? Do you need one?
Successful entrepreneurs are usually too busy building their business empires to pause to think what might happen to the business if suddenly, they are no longer around.
In a typical scenario, business partners have worked well together for many years, building up a thriving business between them. The business is incorporated and they hold the shares equally between them. On the surface their business and family affairs appear straightforward – so why would they need a company will?
Taking this example, let’s consider a few simple questions:
- If your business partner were to die, how would you feel about his family (who probably have nothing to do with the business) owning half of the shares and getting involved in decision making? How would you feel about continuing to work long hours and having to share half of the profits with them?
- Or if you were the one to die first, do you perhaps feel that you have contributed more to the success of the business than your partner? Do you feel that the business will continue to be so successful without you?
A company will is not a single document, but a 3 stage process:
- The shareholders enter into a shareholder agreement, under the terms of which, if one of them dies, the survivor has the option to purchase their shares from the estate and under which the executors of the deceased’s estate can require a surviving shareholder to purchase the shares from them. The circumstances in which these cross options would arise is agreed between the shareholders and can be varied if circumstances change e.g. if children become involved as successor’s in the business. The purchase price is set out, based on a formula agreed between the shareholders.
- The shareholders each take out life insurance written in favour of the other and paid for by the company, to provide funding for the share purchase.
- Each shareholder makes a personal will in favour of their chosen beneficiaries. Shares in a private trading business which have been owned for more than two years will qualify for inheritance tax business property relief, meaning there is no inheritance tax payable on them. However, assuming a surviving shareholder goes on to purchase the shares, this business property relief will cease to apply to the proceeds of sale, which will be liable to inheritance tax at the rate of 40% in the hands. So, instead of bequeathing your shares to your spouse, the shares should be directed into a discretionary trust for the benefit of them and your other chosen beneficiaries. The shares will not then form part of the personal estate of any of the beneficiaries, but will be ring fenced in the trust, and the proceeds of sale of the shares will not become liable to inheritance tax on their death. (Choice of trustees is very important).
This process ensures a deceased shareholder’s family receives fair value for their stake in the business and enables the survivor to continue the business unencumbered by outside interference. It also ensures that almost half of the value of the deceased’s shareholder’s interest in the business does not end up becoming lost in inheritance tax before it passes on to their children.