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INSIGHT: Protecting And Planning Your Business And Shares Ahead Of Death

View profile for Sarah Finnigan
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How do I protect my business after I die?
If you own shares in your family business they may well be your most significant asset and it’s important to understand how they may pass on your death and the most tax efficient way to achieve this, bearing in mind the company is going to continue following your death.
It is common for a family company to have in place a document known as a “Shareholders Agreement” that says what should happen to shares when a shareholder dies.  

Clearly, there is an advantage in keeping the shares within the ownership of the founding family, thus not diluting ownership and making it difficult to agree decisions, whilst also making sure the monetary value of the shares passes to the loved one of the deceased shareholder. 

A well-drafted Shareholders Agreement also avoids potential difficulties following a shareholder’s death when individuals who’ve never had any involvement suddenly inherit a significant shareholding. Having to work with your in-laws or your sibling’s children who know nothing about the business may upset the balance and is entirely avoidable. 

Shares owned in a family company will often qualify for generous relief from Inheritance Tax known as “Business Property Relief”. The Government are keen for family businesses to exploit this so they stay intact untroubled by Inheritance Tax bills they were not expecting and can continue to employ people and pay taxes to support the economy.

Anyone who owns shares in a family company should take advice on the options available to them to pass them on, as well as ensuring that loved ones benefit from your involvement in that family business following your death.

Insurances policies known as “Shareholder Protection” are available to ensure that if a shareholder dies the family company receives a sufficient amount of money to buy out that shareholder’s interest.  This means the shares remain within the control of shareholders who have the family company’s best interests at heart, but also ensures that the loved ones of the late shareholder receive the monetary value of those shares.

These types of insurance policies are complex and should not be undertaken without taking professional advice as to the correct sums to be assured, the most suitable policies to use and the tax treatment of any premiums being paid.   

Indeed, from the financial point of view, it is also the case that insurance policies are taken out by business owners to compensate the business for other financial loss that may arise if one of their directors or shareholders dies.

It can be crippling for a business if a director, a key sales person or an individual within the business who has specific skills or knowledge which are especially valuable to the company dies unexpectedly or prematurely.  So called “key man insurance” can be arranged to cover the loss that may result from a key member of staff dying.

Pearson Solicitors and Financial Advisers have a Private Client team and a Financial Services Team dedicated to guiding their clients through these important and potentially complex decisions, so please telephone 0161 785 3500 for help and advice.

 

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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.