Business Succession Planning

Each Director leaves their share of the business to their beneficiaries via their Will.  The consequences to Director A's beneficiaries are they will now own part of the company which they may not wish to run.  That share of the company is now part of the beneficiaries' estates and therefore is at risk from Divorce, Remarriage, Bankruptcy and Long Term Care.  If beneficiaries decide to sell the business, the proceeds will enter their estates creating a potential IHT liability in their death.

The consequences to Director B are they may not wish to run the company in partnership with Director A's beneficiaries and they may not have the funds to buy out Director A's share of the business.

Note:  The effects of the above problems would increase considerably if the company share is a minority holding.

Perhaps you have made some provision for this eventuality.

You may feel that you have prepared for the worst and taken out sufficient life cover to protect all parties' shares of the business.

You may even have had the presence of mind to set up a Company Will and a Cross Option Agreement.

This would ensure that the surviving business partner(s) has the right to buy out the deceased's share of the business and the proceeds of the Life Assurance Policy could be paid to the surviving spouse or beneficiaries in exchange for their inherited share of the business.  Equally, the surviving spouse or beneficiaries would be able to exercise their right to sell this share of the business to the remaining business partner(s) in exchange for either the market value or an agreed amount covered by a Life Assurance policy.

But what about the impact a Standard Cross Option Agreement has on someone's estate?

If you or a business partner dies, their share will pass to their spouse or beneficiaries through their Will.  This is now deemed to be oart of their estate.  While this share is held and the business continues trading, then the assets could be exempt from Inheritance Tax if they qualify for Business Property Relief (BPR).  Once the Cross Option has been affected, then BPR is no longer available on the proceeds, i.e. from any Life Assurance.  The spouse's assets assessable for Inheritance Tax (IHT) have now increased by the funds received from the Life Assurance Policy risking 40% of the proceeds to IHT, which dependent on the size of the busniess, could be a significant loss.

These assets are also now at risk from attack from any future Remarriage Claims, Creditors or Bankruptcy and Long Term Care costs.

What about the consequences a standard Cross Option Agreement has for the survivng business partner?

With a standard Cross Option Agreement, the surviving partner now owns 100% of the company.  This is fine whilst the business is still trading and whilst BPR is still applicable.

However, what would happen when they decide to sell the business?

Now their personal estate will be increased to include the proceeds from the sale, as for the spouse this leaves them wide open to attack from Inheritance Tax, Creditors and Bankruptcy, Divorce Settlements and Long Term Care costs.

Why you need an exit strategy?

Making a Company Will in your lifetime could not be easier if set out correctly.  All the objectives and aspirations of the shareholder or partners are taken into consideration.  With our bespoke service we can ensure every aspect is covered to ensure your business Will follows the wishes of your personal Will.

Most advisers will end the advice at this point and promise to review the protection and needs of the shareholders annually.  But what about beyond the death planning of a shareholder?  That is where our specialist strategies really come in to play.

As an existing business owner, you'll have a clear vision of what you want to achieve from it and more importantly what you want when you retire or sell your shares.  To maximise the value you get from the business it's essential to think about how you'll leave it further down the line.

Carefully planning your exit from the business can help you to:

• Mould your business into the ideal shape for your chosen exit option - maximising the value you get from it.
• Groom successors if they're coming from within the business - whether they're family member or part of your management team.
• Exit at a time of your choosing, when the business is doing well and the market conditions are advantageous.

Ideally, you should include an exit strategy in your start-up business plan.  It can be reviewed and revised whenever you work on your annual business plan and budget - and you can steer your bsuiness in the direction that your exit option demands.

If you manage an existing business and don't have an exit strategy, you should now think about what your preferred exit option might be - and consider whether you could change the way you run your business to help you achieve it.

The way in which you exit can affect:

• the value you and other shareholders realise from the business
• whether you receive a cash deal, deferred or staged payments
• the future success of the busienss and its products or services
• whether you retain any involvement in or control of your busienss
• your tax liabilities

Share Release Exit Strategy

Presently, shares within your company can present an issue if the company was to be sold in the future.  Capital Gains Tax would usually be charged to the shareholder upon sale.  The current full rate is 28%.  Entrepreneur's relief may be available up to the first £5million for each shareholder.  This is dependent on any previous disposals since 6th April 2008 and the trading status of the company.  The latter can be affected by the nature of assets held by the company.  Whilst the shares may qualify under current Business Property Relief and so be free from IHT, when sold, these shares are replaced by cash which will be included in an individual's estate for IHT purposes and thus taxed at 40%.  Taking appropriate advice and utilising our bespoke strategies, we can maximise the Tax efficiency of how you exit and take funds on the sale of your shares using a Share Release Trust, shares enter a separate Trust, The Share Release.  This allows:

• ​The shares to be sold free of CGT (Shareholder retains his full Entrepreneurs' Relief to be used at a later date perhaps)
• Reinvestment can be made Capital Gains Tax free
• Income returns are Income Tax free
• The share sales proceeds fall outside the estate and so no future IHT liability
• The benefit of the Tax free environment passes down the generations as the structure is still retained

How do Company Wills and Cross Option Agreements differ?

We can offer business estate planning tailor made to suit you and your business.  It takes the standard planning options available on the High Street a significant step further.

Our planning provides this significant protection to the business and reduces the possible impact of Inheritance Tax dramatically.  Furthermore, the business and proceeds from a future sale of the business is protected for the bloodline from Inheritance Tax, Remarriage, Divorce & Separation, Creditor Claims and Care Fees.

Our planning leaves each partner or Director's share of their business to individual Family Trusts through appropriate clauses written in to their Wills.

In addition, the appropriate Life Cover will also be protected ensuring that these proceeds do not impact on the surviving individuals estate.

Once the Cross Option has been signed, our planning ensures that the proceeds from any Life Assurance Policy also do not form part of the beneficiary's estate.  These funds are now protected against any of the risks named above yet the surviving spouse and beneficiaries still have full access to the Trust assets.

So, how does this benefit the remaining business partner?

Once again, the use of Trusts ensures that the surviving business partner retains their original share of the business and still has the fullest of control on the whole of the business as he / she is named as a Trustee of the Trust(s) which now own the deceased Director's shares.

This same Trust can also be utilised as a further efficient Income Tax planning tool.  Now that a proportion of the business is held in Trust, any dividends paid into the Trust(s) could be distributed to beneficiaries of the Trusts who may well have nil or low rate Income Tax.

Should the survivng Director(s) decide to sell the business, only their original share of the business will enter their estate.  The remaining share will belong to Trust for which the survivng Director and his / her family are beneficiaries.

This share is also protected and cannot be assessed for Inheritance Tax (IHT) purposes and provides protection from attack by Long Term Care costs, Divorce and Bankruptcy.