One in three people pass away without making a will. But what happens when one of those people owns a business?

One in three people pass away without making a will (or “die intestate”, in legal parlance). But what happens when one of those people owns a business? James Lewis, a solicitor at Howard Kennedy, explains.

While the intestacy laws may provide adequately for some, they can be inflexible and cause financial hardship for others, particularly where the deceased owns or part-owns a business. Making a will is a precondition for ensuring a smooth succession.

An individual approaching an age at which they wish to retire may have accumulated sufficient assets to allow them to dispose of or pass on their business interests during their lifetime. However, such plans are not always practical and may not come to fruition. If no will is in place the intestacy laws impose a rigid order of entitlement. For example, where someone dies leaving a spouse and children, the spouse will be entitled to all personal belongings, a fixed sum of £250,000 and a right to income, but not capital, of half of the remainder of the estate. The children of the deceased will receive the remaining assets outright.

By relying upon the laws of intestacy the surviving relatives of a deceased person may suffer hardship and a business might be divided between unsuitable and unintended beneficiaries. Conversely, a will allows for detailed planning, ensuring the right persons are benefited and providing for the future strength of a business.

For instance, one person might be most suited to continue the business after an owner’s death. However, that owner might want to ensure the value of the business is shared between a number of people. To cater for this, a specific gift of the business could be incorporated within a will for that person, subject to charges in favour of other family members.

If a business owner wishes to benefit a specific individual, but that person’s abilities are untested, the owner could consider leaving the business to that person in trust, providing a right to the income arising, but no absolute right to capital. Trustees can be given a discretionary power to appoint the capital to the beneficiary at a later date when that individual has demonstrated his or her competence. Alternatively, an owner may be undecided as to who should take on their business interests, and therefore a fully discretionary trust may be appropriate. The trustees will have the power to appoint capital and income to individuals amongst a class of discretionary beneficiaries. The trustees can then assess the circumstances after the owner’s death to ensure that the business interest is dealt with in the appropriate manner. A side letter of wishes produced by the person making the will can effectively guide the trustees in making those decisions.

When succession planning it is also vital to consider the implications of inheritance tax. Subject to meeting certain criteria, the value of a business may be exempt due to the application of business property relief (BPR). If a will contains no specific gift of the business to one or more named individuals, the business may fall into residue and be divided between the spouse and children, particularly where intestacy applies. BPR applies against the whole of the estate and part of it may be lost on the share of the estate passing to the spouse who in any event benefits from spouse exemption for inheritance tax purposes. This could bring about an increased inheritance tax liability.

By putting in place a carefully planned will, individuals with business interests can better protect the future financial security of their family and the future viability of their business.