What will happen to your business?

What will happen to your Business??

You've worked hard to build your business, you have a business partner that is working equally as hard and you both have a clear vision of what you want the business to do and where you want the business to go. All seems great...

As most business owners you are consumed day to day on trying to develop the business into the vision you aspire it to be and as a consequence of this no thought is given to protecting the business. As a business with non related directors / Shareholders you should as part of the set up process determine the value of each shareholding and put a life insurance policy together that is paid for by the business to payout the value of the shareholding on the death of a director / shareholder.

What will happen if you don't set this up? well the shares of the deceased director/ shareholder will be distributed to his beneficiaries via his Will and Estate Planning, meaning the remaining Director / Shareholder could now be in business with the Deceased Wife or Children, would you want that?? probable not. Worse what would happen if the Deceased Director / Shareholder didn't even have a will?? well then you really have a problem. But even worse than that... let's say the deceased Director / Shareholder was a majority shareholder, this would leave you the sole remaining Director Shareholder in a very venerable position. You will have no say on what happens going forward and you will just have to accept the decisions made about the business by your new shareholders. All that hard work gone, just because you didn't set up a contingency plan.

In order to protect the business and to ensure each shareholding is protected fully you would need to set up life cover and a cross option agreement. A cross option agreement in simple terms is a document that states on the death of a shareholder the value of his or her shareholding is paid out in a lump sum from the proceeds of a business life insurance to the deceased family and in return the deceased family pass the shares to the business to control. This allows the remaining director to keep control of the business, and the deceased family have been fully compensated for the value of those shares.

But at Strategic Wills we take this further...

If let's say the value of the business was £1 million pounds, and there are two directors 50/50 shareholding. If one of the directors was to die or become critically ill the life policy would pay out £500k to the Directors Family the problem with that is that as it is just a lump sum and not in trust it will increase the directors estate by the value of £500k meaning that the estate will potentially pay IHT on something that should have been tax free. The more alarming issue is that the remaining director now has £1 million sitting within his estate and if he was to sell the business later would face an even bigger tax liability.

So our solution to this issue is, the life cover is to be paid out to a business trust so the lump sum doesn't enter the deceased estate for IHT purposes and the shares are transferred to a share trust controlled by the remaining director so they do not form part of his or her estate. By doing this not only have we protected the full value for the family, we have also ensured the business can continue to operate, and we have not increased the shareholding on the remaining director.

I have added a short cartoon to illustrate this further.

If you would like more information on how Strategic Wills can work with you to help put together these types of strategies and even look at protecting your own personal estate please get in contact on 01249 704863 info@sap-legal.co.uk or website www.sap-legal.co.uk