Ensuring business continuity for the future

By Sarah Perkins, Katherine Forster, and Deborah Carrivick, Birketts.
Owning a successful business can open a world of opportunities, but it is crucial that you plan for the succession of the company during your lifetime.
Published in UK Director Magazines Summer 2024

Legal: Sarah Perkins, Katherine Forster, and Deborah Carrivick, Birketts

When setting up a business, it is often envisaged that the new venture will provide stability and financial security for future generations, but practical considerations are often overlooked.

Things to consider

What happens when a sole director and shareholder dies? A sole director/shareholder holds the legal authority and decision-making power for the company. If that person dies, the company’s operations halt until the appointment of a new director. If the company was set up before the Companies Act 2006, then the executors will need to apply to court to arrange this which can be slow and costly, during which time the company cannot trade. To prevent this, a co-director could be appointed during lifetime.             

If the company was incorporated post the Companies Act 2006, then the executors can appoint a new director without a court application.

What happens when a sole director and shareholder becomes incapacitated? If a lasting power of attorney for financial decisions (LPA) has been put in place, then attorneys can manage their affairs, which include exercising their rights as shareholders (but not director’s powers).

In the absence of a LPA, an application to the Court of Protection is required for a deputy appointment. This is a long, expensive process during which time the business cannot run.

What is the best way to pass wealth to the next generation? There are several options, and it is important to consider all factors when making a decision.

A business sale during lifetime could be an attractive option, with cash gifts from the proceeds.

An outright cash gift may be inappropriate (due to age, vulnerability, or potential divorce). To afford some protection, you can gift up to £325,000 into trust without any immediate tax consequences.

Alternatively, you could gift some shares into a family trust without triggering an immediate 20% Inheritance Tax charge thanks to Business Relief.

Note: You will need to survive for seven years from the date of the gift to avoid it being clawed back for Inheritance Tax purposes. Capital Gains Tax may also apply in some circumstances.

Alternatively, it may be appropriate for you to retain your company shares and instead gift via your will. If all criteria for Business Relief are met, this would allow the shares to pass without an Inheritance Tax charge. Your estate will also benefit from a Capital Gains Tax uplift on death.

In conclusion

Owning a successful business can open a world of opportunities for you and your family. However, it is crucial that you plan for the succession of the company during your lifetime. Each case will be different and should be reviewed subjectively, considering financial stability, family circumstances, and the nature and structure of the business itself.

We recommend that every business owner has an up-to-date Will and Lasting Powers of Attorney in place.

GET IN TOUCH

Sarah Perkins, Katherine Forster and Deborah Carrivick work in the private client team at Birketts.

Visit www.birketts.co.uk

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