Angharad Lynn, a solicitor in the Private Client team at law firm VWV, says that if you die without a Will, then your estate will be passed on according to the intestacy rules, which changed in October 2014 when the Inheritance and Trustees Powers Act came into force.
“Under the new rules, if an individual dies, leaving a spouse and children, the spouse will take the statutory legacy (currently £250,000) and the rest of the estate will be divided equally between the spouse and the children.” Angharad says that if there are no children, then the spouse inherits the whole estate.
For unmarried couples it is particularly important to have a Will, as the intestacy rules take no account of such relationships. Angharad warns that if there are children, then they will inherit everything, whereas if there isn’t, then the estate will go to other blood relatives. The surviving partner will receive nothing.
Planning for the future
Executors administer an estate after a death and it is usual to have two or three executors. According to Angharad, it is normal to appoint a spouse or children as executors, as she explained: “It is also worth appointing a professional executor, who can ensure that your business assets are dealt with as you wish.” This can be your solicitor or accountant.
One of the reliefs from inheritance tax is Business Property Relief (BPR), which is available for a business or an interest in a business, as well as land, buildings, plant and machinery used for the purpose of the business and shares in unquoted trading companies. BPR is currently awarded at 50% or 100%, and is therefore a generous relief.
Below, Angharad advises ensuring the business will qualify for BPR by checking it meets the requirements. She said: “Businesses must be trading to qualify, and if the proportion of assets held in investments is too high, your business may not qualify.”
Trusting your Will
Business owners often want flexibility after death and for this reason it can be useful to leave business assets in a discretionary trust in the Will, with the surviving spouse and children as potential beneficiaries of the trust.
“These very flexible arrangements,” says Angharad, “allow decisions to be taken after death, rather than trying to predict at the time the Will is made what the situation will be in the future.” She says that after death the business interests can be kept in trust and income paid to the children, or shares can be transferred out to the children in appropriate proportions.
If there are family members who are not involved in the business, Angharad says that a trust can help protect the business. She said: “If uninvolved family members inherit shares directly, they may want a say in the running of the business, even if they do not have the skills or experience to be involved. Using a trust can protect against this.”
She adds that if you are including a trust in your Will, then you should also include a letter of wishes to give guidance to your trustees about how you envisage the trust being used after your death. Angharad advises that the letter is not legally binding, but it can explain to your trustees how you see the capital and income of the trust fund being used after your death.
Review business documents
Angharad’s last suggestion is to ensure that company documents, such as the articles of incorporation and shareholders’ agreement accord with the wishes set out in your Will. She gives examples: “Some family businesses may only allow shares to be passed to direct descendants of the founder. A spouse or stepchildren would not be included in this case. If your Will leaves company shares to your spouse, but the company’s constitution does not allow this, the gift will fail. Alternatively, if the business is run as a partnership, in the absence of a partnership agreement, the Partnership Act 1890 will apply and on the death of a partner, the partnership is dissolved.” Here a surviving partner would have to wind up the business.
It’s also possible to leave instructions in your letter of wishes about the sale of the business and who you think may buy it. You can address issues such as who will manage the day-to-day running of the company until the sale is completed and who the preferred buyer might be.
Without a Will, the wishes of the deceased will not be known, and the law will step in and determine how assets are distributed leaving survivors with not what they expected.
This article featured within the Finance and Business section in the October issue of RCI on page 26.