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Inheritance Tax Laws for Business Assets, Intestacy, Key Person Assurance

Many business assets are totally or partially exempt from Inheritance Tax. However, there may be issues regarding succession.

The first step is to determine the method of ownership of the business in order to clarify the ‘default’ position:

(a) If a client is a sole trader or a shareholder in a private limited company then the default position (in the absence of an agreement) is for the business interest to become part of the client’s estate to be dealt with by his Will or by the Laws of Intestacy.

(b) If a client is a partner then the default position (in the absence of an agreement) is for the business interest to pass automatically to surviving partner(s).

If there is a conflict between the ‘default’ position and the client’s wishes then it is necessary to create a Business (Partnership or Shareholders) Agreement.

In most cases the dilemma that a client finds themselves in is that on the one hand they wish their business interest (and hence control) to pass to the surviving members of the business whilst on the other hand they want their family to receive the financial benefits of all their hard work.

This dilemma is usually resolved by creating an exchange mechanism between the surviving members of the business and the deceased client’s family.

This mechanism forms the heart of the Business Agreement and normally states that in exchange for the deceased client’s interest in the business his family would receive a predetermined sum of money (from the surviving members of the business). Most businesses cannot afford to pay this agreed sum from their reserves and therefore tend to rely on assuring against the event of the death of one or more of the Key business players (known as ‘Key Person Assurance’).

There may be Keyman Insurance or a Partnership Agreement that may provide for the removal of an incapable partner. This however does not cover urgent requirements, such as when a signatory is required. If there is no Enduring Power of Attorney in place, the delay while one is appointed can cause problems with the running of a business or worse. It may be no longer be possible to appoint one and an application would have to be made to the Court of Protection for the appointment of a Receiver.

Note: The watchwords are 'there is much to consider'.