What would happen if you went under a bus tomorrow? It is not a question most of us consider but if most of your wealth is in your business your family’s future might depend on the answer. Many people answer that their business partners would be able to carry on but what about technical issues, such as whether enough directors or partners would be in place to sign deals on behalf of the business? Even if they could carry on, would they be able to buy out your shares so that your family could have the value of it?
Loss of mental capacity can cause significant problems. Imagine your business partner had a stroke and ended up alive but unconscious. They would still control their shares but would be unable to make decisions. Would you be able to complete all necessary legal documentation?
Problems might arise even if nothing happened to you. Imagine if you had been trapped in the Caribbean with no access to phones or email after the recent storms: crucial deals might be affected.
These risks may be small but they are potentially catastrophic for businesses. It is therefore sensible to plan for them. Fortunately, there are simple steps you can take to deal with the risks.
1. Lasting Powers of Attorney (LPAs)
An LPA enables you to appoint others to manage your financial affairs if you are ever in a position where you are unable to do so. Without one an expensive and time consuming Court application may be necessary to give someone the authority to act. The Court will appoint a Deputy to manage your affairs. This will be a professional who won’t know, and may not agree with, your wishes. This can create conflict with your partners and with customers.
Company law says that a company director will automatically cease to be a director if they lack the physical or mental capacity to act as a director. However, where the director also holds shares in the business the attorney can potentially act on their behalf to secure the appointment of new directors, enabling the business to continue or be sold.
2. Cross option agreements
Where the worst has happened you need to know that your wealth will be passed on to your family. Many companies and partnerships use pre-emption rights to allow partners to buy out the estates of people exiting the business. HMRC says that if these amount to an obligation to buy then no business property relief is available; potentially generating a 40% charge to inheritance tax. Cross-option agreements deal with this problem by providing only a right to buy, which becomes compulsory only when it is used.
3. Business protection insurance
How would a buy-out of your shares be funded? Could the business afford it? Could your partners? Insurance can provide a tax efficient way to do this. However, it is important that it is placed into a specialist trust, which will ensure that it is available to the remaining partners or shareholders if needed. A trust also keeps the value outside the estate of the deceased partner for tax purposes.
4. What to do next
If you would like advice on any of these issues please contact Tom Bradfield who will be happy to discuss your individual circumstances.