Inheritance Tax Efficient and Happy Family
As a Family Business Owner, you will be well grounded in the many things that you need to deal with on a daily basis to keep your business going. Besides the daily stuff, when did you last stop and consider what happens next? You died yesterday! Any thoughts?
Why Do I Need a Business Succession Plan?
Family Owned Business and Family, is a compromise that need not include a financial and legal 'high-wire act', without a safety net.
The principal reason for a Business Succession Plan is, that your family will benefit from it, many, many times over; than being without one. We make the bad things go away, so your family won't have to suffer your demise.
When a business owner dies without a good Succession Plan in place, the process of dealing with his Business Estate gets mixed up with his Personal Estate; and the ‘legal eagles’; rub their hands in glee. Unravelling the legal mess is costly in time, money, and particularly, family stress. The loss of business, or the 'death of the business', while all this is going on, is taken as read.
Put yourself into your family’s shoes and your employees’/partner directors’ shoes for a minute. If you were he/she, would you rather have a relatively easy time or a difficult one? As an employee, would you want to know that you have a pay-packet next week, because the business is intact; or as a business partner, you have a business to run, because it has not had to close 'by-law'; or as your spouse/child an inheritance, because the bulk has not been consumed in tax and costs?
How to protect the Family Owned Business
Your Business Succession Plan is the instructions for your family and company community, to apply upon your Business Estate, after you have died, gone 'gaga', or even retired to achieve your business and family aims. It blends the business interests with your family interests in the way you want and helps to smooth the terrain that needs to be crossed at that difficult time. It's a bit technical, but that's our job, and we make it Plain English.
Without a plan, and depending upon the circumstances and the personalities, it is not unusual for the conflicts between family and business to bring things to a court battle. Do not be surprised if the feud denudes much of your family estate value which you wanted to go to your loved ones. What would you prefer? Easy or hard?
What is a Business Succession Plan?
Business Succession Planning is perhaps one of the most underrated and overlooked elements of running a Family Owned Business. It is not the most immediate thing that comes to a business owners mind; what with having to deal with the day to day duties to bring in turnover and profit – the bread and butter. However, without it, your business could cease to exist the moment that you do. It can also happen when you are not quite dead, but seriously ill for example. So, ask yourself this question a little later when you have a minute - “What happens when I …?”
The future and the ‘What if?’ in most business owners’ mind is already set, because they will sell-up for a huge profit and retire to the South of France. This is why the statistics show so many are caught out, leaving the survivors to pay the penalty. As a business owner, you will no doubt, have come across Murphy’s Law, which says - “if it is going to happen, it will do it at the most inconvenient time”. Has this happened to you in some menial matter, like forgotten keys, say? That, no- doubt, was very annoying; but relatively easy to sort. So, imagine it magnified 'just a trifle', and the after-shocks that would come with it, had you died yesterday, or been left mentally incapacitated in a motorway pile-up. What then?
How to preserve you Family Business for the Future
Outside of business, when a ‘private person’ dies without having prepared his Will, ( for simplicity I will use the personal pronoun ‘he’) the Government must step in and take over his personal affairs because nobody has any authority to act on his behalf. In legal speak this is called ‘intestacy’, the person has died 'intestate'. The resulting process is a hard-wired in Statute, so there can be no discussion or offers, and in the last resort all the assets could go to the Crown.
When a ‘business owner’ dies without having prepared his Will, the Government has to step in and decide what happens to the business, because nobody has been given the authority to act on its behalf. However, things reach a whole new level of complication because of contract law. If the business is a sole trader, that is one thing. If the business has employees, or has business partners, it can be a legal and financial mine-field of consequences.
Learn from the mistakes of others, not your own.
Even if you have prepared your Will and left things “all to my spouse”, the implications are that your business -which your spouse may know little about-, will suffer and die for want of appropriate knowledge and management. And then again, if you were in a business partnership, things could end in a conflict over who gets what; in court.
Additionally, as a trading business, you are eligible for what is called Business Relief from the tax man. This could be a 100% tax relief on the transfer of your business value to a beneficiary. i.e. ZERO TAX on the transaction. Zero any tax. If however, your Will is of the usual ‘Simple Family Will’ variety, then your business forfeits this tax relief, and your family may end up having to pay full inheritance tax as well as other tax.
Hence; preparing these matters with good qualified counsel should be a priority in your business management. With regular maintenance it will keep the relationship between family and business a happy one. Going cheap in these circles is usually a false economy.