Skip to content

Posts from the ‘Wills and Probate’ Category

Choosing Executors – HR’s Role In Advising Business Owners on Inheritance

Following the death of a business owner, an executor will be nominated (in the will) to manage the administration of their estate (probate).  People will often ask friends or relatives to act as executors for their will, but for business owners the implications of choosing the wrong executor can be unexpectedly detrimental in the long term.

Probate generally lasts a minimum of a year in the UK (often longer for complex estates), and if there’s no suitable alternative, an executor may be required to step in as an interim business manager.  Without formal instructions in the will, the executor’s default position will be to sell the business and pass on the proceeds of the sale to the beneficiaries.  However, this may not be in the best interest of the beneficiaries, as an expedient sale may not deliver the best return.  Therefore, the executor has some discretion in how and when business assets are disposed of.

Given this responsibility an executor’s role might include:

  • Taking over the management of a company.
  • Opening new bank accounts.
  • Transferring staff under TUPE (and managing the resulting tax and national insurance implications).
  • Taking on responsibility for health & safety, employment contracts and environmental obligations.
  • Letting, buying, or selling assets (including land and property).
  • Defending the business against litigation or issuing claims against others.
  • Assuming the legal ownership of shares.

The executor is personally responsible to the beneficiaries for the effective management of the business, in the period between the owner’s death and the completion of administration.  If executors fail to manage a business efficiently, or fail to distribute the deceased’s estate as decreed by the will, the beneficiaries can ask for the courts to step in. In addition, if the actions of the executor reduce the value of the beneficiaries’ legacy, they can recover any losses from the executor. Beneficiaries can and do sue.

That is not to say that an executor cannot employ specialist professionals to assist in managing the business.  They can also insure themselves against claims. To give additional support, the deceased may nominate up to four executors, all with different experience, to help administer large or complex businesses.

Given the complexity, responsibility and accountability inherent in the role of the executor(s), it’s well worth choosing them very carefully.

[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes.  In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]

 

 

 

Taxation – HR’s Role In Advising Business Owners on Inheritance Issues

 

überarbeiteter geschäftsmann

‘Tax doesn’t have to be taxing’ ran the HMRC’s old ad campaign, encouraging us to fill in our tax return on time.  But when it comes to taxes that are due on the death of business owners, the statement simply does not hold true – they’re complex, convoluted and, when incorrectly managed, horrendously expensive.  It’s therefore absolutely essential to get skilled and professional advice.  That said, in this third blog we’ll look at tax basics for HR consultants, as a rudimentary knowledge of inheritance taxation is essential when advising owners.

Not many people realise that the starting point for administering the decease’s affairs is a tax return.  Until the tax is paid, the court will not give the go ahead (the grant of probate) for the executor to begin the process of paying creditors, charges, expenses and finally, legacies.

Income Tax

Although the business owner may be deceased, there is still an obligation to pay income tax.  Firstly, tax is due on any income earned prior to death (although the owner’s estate will benefit from the full annual allowance, irrespective of the date of death).  Normal tax planning, carried out during the owner’s lifetime, is the only effective strategy to reduce tax owed.  Secondly, income may not stop just because the business owner has died.  For example, a ‘buy to let’ landlord‘s property will continue to generate revenue after they die, until the end of the tenancy.  Executors will be liable to pay any income tax due at the time of the owner’s death and on any continuing income, both of which will be taken from the estate.

Inheritance Tax

Inheritance tax, currently charged at a maximum of 40% in the UK, tends to be the main focus of business owners’ anxieties.  After their inheritance tax allowance (the nil rate band) is taken into account, all of an owner’s assets are lumped together, including their business interests, for tax calculation.  But a great deal can be done to reduce the inheritance tax liability of these assets.

As an example, trading companies (e.g. engineering) attract 100% inheritance tax relief, whereas investment companies (e.g. commercial property) attract 0% relief.  Consider an engineering business that also has some commercially rented property.  If the majority of the profit, time and turnover is attributed to property rental, it may be advisable to split the business into two.  As the company’s activities will be assessed for inheritance tax ‘in the round’ (in this case predominantly investment) the company can only attract  inheritance tax relief with structural change.

Capital Gains Tax

Capital gains tax (CGT) is not primarily concerned with the death of the business owner. Assets are passed from that individual to the beneficiary without any CGT to be paid.  However, when the beneficiary finally comes to sell their inherited asset, CGT will be charged at 18% or 28%.  As in the case of inheritance tax, a lot can be done in terms of prior planning to reduce the impact of the tax, especially considering differing individual tax rates and reliefs.

For example, business assets that are to be sold after the owner’s death will attract CGT if the assets have increased in value.  Executors and beneficiaries both have the power to sell assets, although they may be subject to different CGT rates, different allowances and attract different reliefs.  So a conscious choice can be made regarding who will sell the assets and when, to reduce the CGT bill.

So taxes, like dying, are inevitable.  However, with careful planning, their impact can be greatly reduced.

[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes.  In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]

Succession or Sale? – HR’s Role In Advising Business Owners On Inheritance Issues

Two Hands Passing A Golden Relay BatonThis second post explores the opportunity for human resource consultants to advise small business owners on the future of their business, after their deaths. We’ll look at the important question of succession or sale after the owner’s death. It’s a rather long post, but there’s a lot to consider.

Before any planning can begin, it’s vitally important to get an up to date assessment of the business’s current value and future prospects, as financial viability will determine what options are available to business owners.

Succession or Sale?

The first decision to be made about the future of a business is whether it should be retained or sold, based on financial viability, the suitability of people wishing to take over its stewardship and the current owner.

If the business is losing money and has no prospect for future recovery, it may be better to close it sooner rather than later.  The cost of shutting down a small business and any debt it has incurred, will be met by the deceased owner’s estate.  As creditors receive preference over those who are left a legacy in a will, they will receive their money first, leaving beneficiaries empty handed.  However difficult it may be emotionally, it may be better to close the business now and manage the impact of the resulting debt.  Assuming the decision is to dispose of the business, and it is financially viable, it’s relatively straightforward to make arrangements in the will to sell it.

But if succession is a possibility, there’s a number of important factors to be taken into account:

  • Who would want to continue running the business? Owners often consider their children to be natural successors, but they may have no interest in taking on the responsibility of managing the business.
  • Who has the skills, knowledge and reputation? Although a willing successor is always preferable, but they may not have the profile, competence or experience to make the business work.
  • Is it important to keep the business in the family? Has the business become such an integral part of the family, either emotionally or financially, that it cannot be sold.

Sole Traders and Partnerships

For sole traders, the business must close on the death of the owner.  However, its assets can be left as a legacy to the chosen beneficiaries, picking up where the deceased owner left off.  It’s important to identify the business assets in the will and nominate the specific beneficiary, otherwise the assets will be lumped in with the residue of the estate and sold.

With partnerships the situation is slightly different.  The future of the business needs to be decided well before either partner’s death and set out in the partnership agreement.  The agreement must specify what will happen to each partner’s share and how, and if, the business will continue.  Working in tandem with each partner’s will, the future of the business will be assured when written into the formalised partnership agreement.

Family Businesses

Decisions about who will inherit the business can be decidedly more complex for families.  One option for owners who wish their businesses to benefit future generations, is the formation of a trust.  The legal ownership of the business passes to trustees, nominated by the deceased owner, who have an obligation to manage the business for the benefit of the trusts’ beneficiaries (i.e. the family).  Trusts are a convenient way of ensuring a family benefits from the future proceeds of the business, without the necessity for ‘hands on’ management.

Limited Companies

Owners with shares in small companies may have particular problems with the transfer of their shareholding.  The general principle is that an owner’s shares will form part of their estate on death.  However, written into some companies’ articles of association is the right for the existing shareholders to buy the deceased’s shares (pre-emptive rights), robbing beneficiaries of inheritance tax savings and the right to sell the shares when they choose (for the best price).  A ‘share transfer agreement’ is the preferred method of transferring inherited company shares, giving the beneficiaries the choice of when to sell their shares, and other shareholders a guaranteed option to buy.

Next week we’ll take a look at taxation.

[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes.  In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]

 

Giving It All Away ? – Why Gifting Your Home to Your Children May Not Be Such A Good Idea

When considering the impending burden of inheritance tax and the cost of care, many parents feel that giving their home to their children could be a very attractive option.  Their plan is to continue to live in the home, but pass the legal ownership to their children.  Then, if they are required to meet the cost of their care, or if inheritance tax is due on their estate after death, they would have dispensed with the ownership of their biggest asset.  Therefore, no claim can be made on their wealth.  In addition, they could live, at no additional cost, in their home and their children would receive their rightful inheritance, perhaps a little sooner than they expected.

­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­There are perhaps two very good reasons why this plan might not be a very good idea.  Firstly, in gifting your home to another person you lose the element of control.  You may be on very good terms with your children at the moment, but relationships can change, or their circumstances might take a turn for the worse (e.g. bankruptcy, divorce) – which might leave you homeless.

Secondly, local authorities (who pay for the majority of adult care) and HMRC may conclude that you have deliberately deprived yourself of an asset, in order to evade paying tax or care costs.  In the case of Inheritance tax, it is perfectly legitimate to give away your property before you die to reduce the tax burden.  You must then survive seven years after the gift has been made or inheritance tax must still be paid, although the tax decreases with every passing year (taper relief).  However, if you continue to live in the property without paying a market rent HMRC will act as if the gift was never made.  Inheritance tax will have to be paid in full when you die (with no taper relief) and concessions towards the payment of capital gains tax, normally passed from parents to children, will be lost.

In terms of transferring assets to avoid care costs, it’s illegal and local authorities have the power to include gifted property in their means test for care funding, especially if it’s been given away six months before care is required.  The new owners of your home may be asked to pay your care costs

There is no fool proof way to totally avoid care costs and inheritance tax.  However, one potential solution to mitigate these costs is to make a will and place your biggest asset (often your home) in a trust, a process that will be covered in more detail in our next blog post.

[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes.  In addition, this blog is not a substitute for personalised advice by a professional adviser.]

Death in Service Benefits – The Importance of Reviewing Nominations

Photo of thinking business woman with hand on head on white background

Many employees are entitled to a death in service benefit from their employer.  The figure can vary considerably from a very small sum to over ten times an employee’s annual salary.  The benefit is usually linked to the staff pension scheme and will be free of inheritance tax, if the following criteria are met:

  • The payment is no greater than four times the annual salary.
  • The nomination of a beneficiary is made before the employee’s death.
  • The payment is made before the date the employee receives a pension.

Death in service benefits are unusual in that that they are paid outside of a will or the intestacy process, i.e. they do not form part of the deceased’s estate.  On the downside, this means that dependents, and the courts, have no means to intervene if there is a dispute about who receives the payment.  As these benefits are usually part of a pension scheme, trustees will normally have discretion about who to pay, but they are usually very reluctant to go against the employee’s previous nomination.

A case we came across involved a young employee who was tragically killed in a motor cycle accident.  Although he had recently become a father in a new relationship, he had not considered his death in service nomination and the payment was made to his previous partner (a relationship that had ended acrimoniously).  Following his death, the company instituted a scheduled reminder for all employees to review their nominations.

As with all estate planning (wills and other post death considerations) regular reviews of personal circumstances are essential and, in this case, the responsibility sits squarely with the employee.  But employers can give a helping hand here, with an annual message to encourage employees to review their nominations, ensuring those named still reflect their wishes.

It takes only a minimal effort to send an annual reminder, but for those families involved in the tragedy of bereavement, it could make a world of difference.

When Your Signature Is More Than Just a Formality – The Final Steps in Executing a Will

Considering all the time and expense that can go into creating a reliable will, it’s surprising that people still get the final steps wrong.  But failing to stick to these seemingly simple formalities can render your will totally invalid.

Firstly, the person who is the subject of the will (the testator) must sign the handwritten, typed or printed will, to show they intended to give effect to the document.  If the testator is blind, or cannot make an identifying mark, they can direct another person to sign the will, but it must be in their presence and under their direction.

Secondly, at least two people are required to witness the signature of the testator.   Most people can be witnesses, except those who will receive a legacy in the will (including the testator’s spouse or civil partner) or those lacking mental capacity.   Together, the witnesses must either see the signature being made or acknowledged by the testator.  Each witness then signs, or acknowledges, their signature in the presence of the testator, but not necessarily in the presence of the other witnesses.  As an added precaution some wills are initialled, by the testator and the witnesses, on each page.

Ideally, wills should not be altered once they have been signed and witnessed.  If an alteration is required, it’s preferable to complete a codicil, which is a separate amendment, requiring the same formalities (signing and witnessing) as the will itself.

Nobody may know, until the testator dies, if the formalities have been followed correctly.  When the will is submitted to the court to be approved before use (probate), it’s first checked for any irregularities.  Similarly, if a person wants to contest a will, they’ll begin by painstakingly examining every single element of the will, including the formalities.  In both cases, if things are not exactly right, the will is declared invalid and the rules of intestacy, usually applied when there’s no will, are used to determine how a testator’s property is divided.  This is probably not what the testator would have wanted, and it wastes the time and expense that went into creating a will.

So how can you avoid infringing the formalities?  With a DIY will, it’s all down to the testator to make sure the formalities are completed correctly.  Will writers, who construct your will for a fee, generally issue a set of instructions for completing formalities and check the executed will after execution.  An even better alternative, which prevents mistakes due to misinterpretation, is for the will writer to be present at the time of signing and witnessing, just to make sure that everything is exactly right.

The formalities seem simple enough, but as many cases in the courts and legal textbooks will bear out, it’s surprisingly easy to make a costly and irreversible mistake.