Published on November 17th, 2015 | by Pete0
Will and Legacy Considerations When Creating a Business
With so much to consider when setting up a business for the first time, it’s the rare entrepreneur who gives even a passing thought to Wills or Legacies. However, given that none of us has a crystal ball, this kind of forethought and planning can safeguard everyone’s interest in the business.
Planning who will take over the business when you’re no longer able or willing is important for future continuity. Succession plans generally stipulate who will take over the business and what each person’s role will be.
Having a plan early on allows you greater vision when it comes to growing the business beyond current boundaries. Not only can your intended successors take an active role in developing their future position, you avoid undue competition between potential heirs. This is particularly important when you’re creating a partnership because each partner needs a clear understanding of what will happen to the other partner’s share in the future.
Making a Will allows for future business succession planning that’s as watertight as it can be. Your current planning might not extend beyond your retirement, but if you haven’t made a Will and included business matters you run the risk of your share – or even the entire business if you’re a sole trader or owner – falling into unqualified hands due to the rules of intestacy.
What would constitute unqualified hands? Children, for instance, who are too young to run the business, or relatives with no business knowledge or desire to learn. Having inexperienced hands on the helm of any business could spell disaster, not just for your own loved-ones future financial security, but for business partners too.
Under UK intestacy rules, business partners have no right to inherit your business shares regardless of any verbal or unwritten terms of agreement. Without a Will, the majority share could move beyond their control if, for instance, your shares pass to your spouse or children. In the event of your having no living relatives, your share of the business could even pass to the state.
By making a Will, you take control. You can set out in writing exactly how, and by whom, your business should be run in your future absence.
Inheritance tax can get complicated when there are business assets to take into consideration. Allowing beneficiaries time to make provision so there are no unexpected bills helps prevent taxes having too great an impact on business finances.
The inheritance tax threshold is currently £325,000, a figure easily reached when property or other assets are taken into consideration. Assets above the threshold are charged tax at a rate of 40%, which for even modestly sized businesses can run into thousands in taxes owed. These become payable after six months, with additional interest charges if the tax remains unpaid.
Whether from a philanthropic standpoint or just because you want to give something back, many business owners choose to leave part of their estate to charity in their Will as a legacy. For some, it not only satisfies a desire to support favourite good causes, it can help reduce inheritance tax bills.
If you leave to charity 10% or more of the net value of your estate (net value being after all debts, liabilities and reliefs are taken care of) the inheritance tax bill reduces from 40% to 36%. There are some exemptions, for instance anything left to a married or civil partner. In addition, the components of the estate must be taken into account which can mean some are still charged at 40%, but if you needed any additional prompting to remember a charity in your Will, this could be it.
It’s worth noting this recent case and the resulting legal advice that anyone leaving a gift to charity should establish some prior connection to the charity.
While you’re still planning and creating a business, considering future needs and including your wishes in a Will can make a huge difference when it comes to future success.