Will power: part two

Adam Bernstein continues looking at how to plan for the tax-efficient passing of business assets

By Adam Bernstein | Published:  30 August, 2019

Death and taxes are the two givens in life, a view popularised by a US founding father, Benjamin Franklin. And so, we need to put in place a Will if we want to pass on the most we can. Sadly, as the statistics bear our, the majority of the population do not have a Will.
    
Business owners especially need to be concerned about this as they need flexibility after death. It’s for this reason that Angharad Lynn, a solicitor in the Private Client team at law firm VWV, says it can be useful to leave business assets in a discretionary trust in the Will with the surviving spouse and children as potential beneficiaries of the trust: “These very flexible arrangements allow decisions to be taken after death, rather than trying to predict at the time the Will is made what the situation will be in the future. After death the business interests can be kept in trust and income paid to the children, or shares can be transferred out to the children in appropriate proportions, depending on who is most involved in the business.”
    
If there is any doubt whether the business assets will qualify for Business Property Relief (BPR), or if the business owner is concerned that BPR may be curtailed, a trust that has as potential beneficiaries both exempt (the spouse) and non-exempt (the children) beneficiaries can be useful. Says Angharad: “On the death of the business owner, the beneficiaries can ascertain whether the business assets will qualify for BPR. If it does apply, then under s.144 of the Inheritance Tax Act 1984 the trustees may decide to transfer the assets out to the children and wind up the trust. No inheritance tax will be payable. If the shares do not qualify for BPR, the assets could be transferred out to the spouse, again ensuring that no inheritance tax is payable, thanks to the spouse exemption.”     
    
She adds that provided this is done within two years of the death of the business owner, these steps can be 'read back' into the will so that it is as if the deceased had left the assets in this way for inheritance tax and capital gains tax purposes.
    
There is another point worthy of consideration – If there are family members who are not involved in the business, the use of a trust can protect a business. If uninvolved family members inherit shares directly they may want a say in the running of the business, even if they do not have the skills or experience to be involved. Using a trust, reckons Angharad, means the beneficiaries would not have a direct right to any interest in the business and therefore no direct influence.
    
Lastly here, if you are including a trust in your Will, Angharad says you should also include a letter of wishes to be stored with it, giving guidance to your trustees about how you envisage the trust being used after your death. “A letter of wishes is not legally binding, and it is important to state that you do not intend to fetter the discretion of the trustees. However, the letter can explain to your trustees how you see the capital and income of the trust fund being used after your death.”
    
A last piece of advice from Angharad is to ensure that business documents, such as the articles of incorporation and shareholders' agreement accord with the wishes set out in your Will. Further, she says, ensure your business has the correct documentation in place. “Take a partnership - in the absence of a partnership agreement, the provisions of the Partnership Act 1890 apply. Under this Act, on the death of a partner the partnership is dissolved. This could leave a surviving partner in a very difficult position. They would have to wind up the business, pay the debts of the partnership, and distribute whatever is left.”

To finish
Those without a Will are sending their family into dangerous territory and a painful interregnum. Quite simply, the wishes of the deceased will not be known, the law will step in and determine how assets are distributed leaving survivors with not what they expected.


The charity Will-Aid runs a scheme each November where simple Wills can be written for a charitable donation: www.willaid.org.uk

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