How to Protect Your Family Business in Your Estate Plan
Running a family business is both a rewarding and complex endeavour. Beyond daily operations, business owners must also think about the future—how to ensure the business remains strong and continues to benefit their loved ones after they are gone. Estate planning plays a crucial role in protecting a family business, ensuring a smooth transition, minimising tax liabilities, and safeguarding the company’s long-term success.
Many business owners delay estate planning, assuming they have plenty of time to deal with it later. However, unexpected events can disrupt even the best-laid plans, potentially leaving the business and family in turmoil. By proactively structuring an estate plan, you can secure the future of your business and provide financial security for your family.
Why Estate Planning Matters for Family Businesses
Without a clear succession plan in place, family businesses often face uncertainty upon the owner’s death. Disputes over ownership, tax burdens, and management challenges can jeopardise the future of the business. A well-structured estate plan:
- Ensures business continuity and smooth succession.
- Protects against unnecessary inheritance tax liabilities.
- Prevents family disputes over ownership and control.
- Provides financial security for dependents and beneficiaries.
- Reduces legal complexities and administrative burdens.
Now, let’s explore how to structure an effective estate plan for your family business.
1. Define Your Succession Plan
A clear succession plan is the foundation of estate planning for any business. Start by considering who should take over the business—whether a family member, key employee, or external buyer. Steps to take include:
- Identify a successor: If a family member is interested and capable, ensure they have the necessary skills and experience. If no family member is suitable, consider a management buyout or external sale.
- Communicate your wishes: Discuss your plans with family members to prevent conflicts and misunderstandings.
- Document the plan: Work with legal and financial advisers to formalise the succession plan in your will and business agreements.
2. Use a Will to Clearly Outline Your Wishes
Your will is a vital document in your estate plan. Without a legally valid will, your business assets may be distributed according to intestacy laws, which might not align with your wishes.
- Specify how you want your business to be passed on.
- Appoint an executor who understands your business or can seek the right advice.
- Consider creating a separate letter of wishes to provide additional guidance to your family.
3. Consider a Business Trust
A business trust can help protect your family business from disputes and tax liabilities. By placing the business into a trust, you can:
- Control how the business is managed and distributed after your death.
- Provide income to family members while ensuring the business remains operational.
- Reduce inheritance tax (IHT) liabilities, as some trusts may qualify for Business Relief (BR).
There are various types of trusts, so consult an estate planning specialist to determine the best option for your business.
4. Minimise Inheritance Tax (IHT) with Business Relief
Inheritance Tax (IHT) is a major concern for business owners, as the standard rate is 40% on estates above the nil-rate band (£325,000). Fortunately, Business Relief (BR) can significantly reduce or eliminate IHT on your business assets.
How Business Relief Works:
- 100% relief: Shares in an unlisted trading company or a sole trader business may qualify for full IHT relief.
- 50% relief: Some business assets, such as land and buildings used by the business, may qualify for partial relief.
- Conditions: The business must be a trading entity (not just an investment vehicle) and must have been owned for at least two years.
- Cap: The Autumn Budget 2024 announced that from April 6, 2026, inheritance tax (IHT) Business Relief (BPR) and Agricultural Property Relief (APR) will be capped at £1 million for 100% relief, with assets above that threshold receiving 50% relief.
To ensure your business qualifies for BR, work with an experienced tax adviser.
5. Establish a Shareholder or Partnership Agreement
If your business has multiple owners, a shareholder agreement (for limited companies) or partnership agreement (for partnerships) is essential. These agreements outline:
- What happens to a deceased owner’s shares.
- Buyout provisions to prevent unwanted third-party involvement.
- Voting rights and control mechanisms.
A well-drafted agreement can prevent disputes and ensure a seamless transition.
6. Set Up a Lasting Power of Attorney (LPA)
A Lasting Power of Attorney (LPA) ensures that if you become incapacitated due to illness or injury, a trusted person can manage your business affairs. There are two types:
- Property and Financial Affairs LPA: Covers business finances, asset management, and decision-making.
- Health and Welfare LPA: Covers personal health decisions but is less relevant to business matters.
Appointing a business LPA ensures continuity and prevents legal complications.
7. Consider Life Insurance for Business Protection
Life insurance can provide liquidity to cover tax liabilities, business debts, and financial support for your family. Key policies to consider include:
- Shareholder protection insurance: Ensures remaining business owners can buy out the deceased’s shares.
- Key person insurance: Provides financial support if a crucial business figure (e.g., owner, senior manager) passes away.
- Relevant life cover: A tax-efficient policy for business owners that provides a lump sum to beneficiaries.
Having the right insurance policies in place reduces financial strain and ensures business stability.
8. Regularly Review and Update Your Plan
Business and personal circumstances change over time, so it’s crucial to review your estate plan regularly. Consider updating your plan when:
- There are changes in business structure (e.g., new partners, company expansion).
- You acquire or sell business assets.
- Tax laws and regulations change.
- Your family situation changes (e.g., marriage, divorce, birth of children).
An outdated plan can create legal and financial challenges, so schedule periodic reviews with your financial adviser and solicitor.
Final Thoughts
Estate planning is a crucial step in protecting your family business and ensuring a smooth transition for future generations. By taking proactive steps such as defining a succession plan, leveraging tax reliefs, setting up trusts, and securing appropriate insurance, you can safeguard your business and your family’s financial future.
Seeking professional advice from a solicitor and financial planner is key to developing a robust estate plan tailored to your specific business needs. If you need help structuring your estate plan, contact a qualified adviser to discuss your options.
