Ensuring business continuity for future generations

This article was originally published in Norfolk Director magazine Summer 2024. 
 

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

• What would happen if the sole director and shareholder were to die or become incapacitated?  

• What is the most appropriate way to pass wealth down to future generations?  

Each case will be different and should be reviewed subjectively, considering financial stability, family circumstances and the nature and structure of the business itself.  

What happens when a sole director and shareholder dies?  

A sole director and shareholder hold the legal authority and decision-making power on behalf of the company. If that person dies or becomes incapacitated, the company’s operations halt until appointment of a new director.   

If the company was set up pre the Companies Act 2006 then the director’s executors will need to apply to court. The court will need to register them as shareholders, enabling them to appoint a new director. This exercise can be slow and costly, during which time the company cannot trade.  

To prevent executors being embroiled in the court system at an already difficult time, a co-director could be appointed during lifetime. Of course, this should be given careful consideration, particularly as a co-director may have differing ideas on how the business should operate.  

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 sole director and shareholder becomes incapacitated, then the company could face similar disruptions. 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 where the outcome is unknown and during which time the business cannot run.  

Passing wealth to the next generation 

When considering a business’ future, the next generation’s financial security is often paramount. 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. Subject to surviving the date of these gifts by seven years, they can fall outside of your estate for Inheritance Tax purposes. 

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. For Business Relief to apply, the company must not be subject to a contract for sale at the time of the transfer as well as other requirements. Again, you will need to survive for seven years from the date of the gift to avoid it being clawed back for Inheritance Tax purposes on death.  

A company sale or shares gift will be disposal Capital Gains Tax purposes, creating a possible charge. Where shares are transferred into trust, business asset disposal relief may apply. This allows the first £1 million of gains to be taxed at 10%, assuming the business owner’s lifetime allowance is fully available. Gifts holdover relief may also be available if all requirements are met, which allows the tax to be delayed until a share disposal by the trustees.  

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, where beneficiaries acquire the shares at the market value at the date of death.  

The Birketts view 

Owning and running 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. Every business owner should have an up-to-date Will and lasting powers of attorney in place.