For many entrepreneurs and business owners, building a family business represents a lifetime of hard work, passion, and commitment. It often stands as a lasting legacy intended to benefit future generations. However, without proper legal and financial planning, the transfer of shares in a family business through a will can become a complex, emotionally charged, and potentially contentious issue.
Effective estate planning ensures that your intentions are executed correctly, the value of your business is preserved, and your beneficiaries are treated fairly. Central to such planning is structuring your will in a way that facilitates a smooth transition of ownership while maintaining the best interests of the business and family relationships.
Planning the future of your shares in a family business not only protects your own interests but also serves to safeguard the company’s long-term stability. A carefully considered will can also mitigate legal disputes and reduce exposure to inheritance tax, supporting your loved ones both emotionally and financially.
Before drafting or updating your will, it is crucial to clearly define your personal and business-related objectives. These goals may vary depending on the size of the business, your family’s needs, and your preferences regarding ongoing involvement or control. Key considerations include whether the business should remain under family control, how shares should be distributed, and whether any family members should take active roles in management.
You may also need to consider how to treat non-business family members fairly. For instance, if only one child is actively involved in the business, you might wish to leave them a larger shareholding, balanced by other assets such as property or investment portfolios for your other children. Alternatively, you could establish clear guidance for the management and distribution of profits to ensure equitable benefit from the business without compromising control.
Achieving clarity on these matters early in the estate planning process is essential. It provides the foundation for subsequent legal mechanisms, such as trusts or shareholder agreements, which can protect family relations and minimise the potential for disputes after your passing.
One important aspect of transferring shares through a will is understanding the value of your business and the potential tax consequences. A professional valuation offers a snapshot of the company’s worth and can provide a benchmark for the equitable distribution of assets. It is especially useful when some beneficiaries will receive shares and others will not.
In the UK, shares in a business can qualify for Business Relief (formerly known as Business Property Relief), potentially reducing inheritance tax liability by up to 100%. To optimise this tax relief, careful structuring and compliance with HMRC requirements are necessary. For example, your business must be a qualifying trading company, and you must have owned the shares for at least two years prior to death.
Importantly, Business Relief does not apply to all companies or to all types of shareholdings. Investment or non-trading companies, such as those holding only rental income from property, typically do not qualify. Misunderstanding the eligibility criteria can lead to significant tax liabilities and unanticipated costs for executors or beneficiaries.
Working with knowledgeable financial advisers and solicitors ensures that your will is structured to capture available tax reliefs while complying with legal regulations. Periodic reviews are also recommended, as tax laws evolve over time and may impact your future planning.
Once your wishes and tax considerations are clarified, it is time to determine the appropriate legal mechanisms for transferring ownership. There are several options to consider depending on the complexities of your business and family dynamics.
One straightforward approach is to transfer shares directly through your will by naming specific individuals as beneficiaries. This method is relatively simple but requires careful drafting to ensure clarity. It is also essential to consider whether such a transfer aligns with existing shareholder agreements or company articles of association, as these documents may impose restrictions on share transfers.
Alternatively, you might consider placing your shares into a discretionary or family trust. Trusts can offer greater flexibility, especially when circumstances could change in the future. For example, a discretionary trust allows trustees to decide how shares are distributed among beneficiaries, taking into account changing family needs or new tax considerations. This structure also helps to shield the business from third-party claims, such as those arising from divorce or bankruptcy of individual beneficiaries.
However, trusts also come with administrative responsibilities, potential tax obligations, and compliance requirements. It is important for the appointed trustees to have a thorough understanding of their duties and the objectives of the trust. Selecting trustworthy and competent trustees—whether family members, professionals, or a combination thereof—is essential for ensuring the effective management and integrity of the trust.
One potential area of conflict in transferring business shares arises from differing expectations among family members. Incorporating or revising a shareholders’ agreement can act as a vital tool in preventing disputes, regardless of how shares are distributed in your will.
A well-drafted shareholders’ agreement sets out the rights, responsibilities, and expectations of each shareholder. It can dictate how shares are transferred, how directors are appointed, and how profits are allocated. Where several family members hold shares, it also helps to clarify voting rights, succession in management roles, and the procedure for resolving disputes.
In context with your will, a shareholders’ agreement can restrict or permit share transfers upon death, giving other shareholders a right of first refusal or requiring that shares remain within the family. Aligning your testamentary wishes with existing corporate documents is critical for avoiding legal and operational uncertainties.
Legal professionals and corporate advisers should be involved in the periodic review of shareholder agreements, particularly following significant life events, evolution of the business, or updates to your will.
Transparent communication plays a pivotal role in ensuring your estate planning intentions are well understood and accepted. While conversations about death and succession can be difficult, failure to have these discussions may breed misunderstandings, resentment, or even litigation.
You might consider holding a family meeting to discuss your plans and listen to the views of those involved. Such a dialogue provides an opportunity to explain your reasoning and give reassurance to those who may feel apprehensive or left out. In many cases, this openness prevents feelings of injustice or surprise after your death.
If your intentions deviate from equal distribution or differ significantly from traditional expectations, it becomes even more critical to engage in such discussions. You can also write a ‘letter of wishes’ to accompany your will. While not legally binding, this document can provide important personal context to your decisions, helping beneficiaries and executors understand the motivation behind certain provisions in your will.
Having a professionally prepared will ensures your shareholding is transferred in accordance with your wishes and that your estate benefits from appropriate tax efficiencies. A will should include clear language outlining who inherits your business interests, under what conditions, and any stipulations tied to such inheritance. You may also want to appoint specific executors who are capable of dealing with commercial entities.
As business and personal circumstances evolve, it is vital to review and, if needed, update your will periodically. Events such as marriage, divorce, the birth of children, changes in business valuation, or the entry of new shareholders can all affect the relevance and effectiveness of your document.
Legally, a will must comply with the Wills Act 1837 and be executed properly to be valid. Instructing a solicitor with experience in business succession planning will help you meet these requirements while reflecting the nuances specific to your situation. DIY wills or unqualified advice may not cater for complexities in shareholding and may lead to costly mistakes.
Once a person passes away, the estate enters the probate phase. Executors are responsible for submitting the will for probate, valuing the estate, paying any applicable taxes, and distributing assets—including business shares—according to the will’s instructions.
If your family business is substantial or contains intricate arrangements such as trusts or cross-border elements, the management of probate becomes significantly more complex. Appointing professional executors (such as solicitors or accountants) may be sensible in such scenarios, offering a blend of legal capacity and commercial acumen.
Additionally, delays in obtaining probate can interrupt the smooth running of a business. Executors must be prepared to act swiftly and liaise with the company’s board, shareholders, and legal advisers to ensure continuity of leadership and financial stability.
To support your executors, consider putting together a business continuity pack. This might include shareholder agreements, trust deeds, up-to-date financial records, banking information, and contact details for key advisers. While not a legal necessity, it contributes vastly to reducing stress and facilitating the orderly administration of your estate.
Consider an example involving a father who owns a successful construction company and has three children—two of whom are actively involved in the business, and one who pursued a different career. In his will, he decides to leave majority shares to the two active children and other residential property and investments to the third. By doing so, he preserves the functional integrity of the business while ensuring each child receives value roughly equivalent to their expected share.
In another case, a mother foresaw that her children might fall out over control of the family-owned farm. She set up a discretionary trust to hold the shares and appointed an independent trustee alongside her eldest child. This structure enabled flexibility in managing distributions, protected the farm’s commercial operations, and introduced impartial oversight to safeguard sibling relationships.
These examples show how tailored approaches, underpinned by legal and financial structures, can help to navigate delicate family dynamics while preserving the business’s continuity.
Given the multifaceted nature of leaving shares in a family business, from legal drafting and tax to financial planning and interpersonal factors, obtaining professional advice is more of a necessity than a suggestion. Engaging advisers with expertise in estate planning, corporate law, and inheritance tax strategy ensures that your decisions rest on a solid foundation.
Working collaboratively with your solicitor, accountant, and financial planner allows all aspects of your succession plan to be fully integrated and aligned with your broader estate goals.
Passing on shares in a family business through your will is more than a legal task—it’s a profound act of legacy-building. By taking the time to define your objectives, address tax implications, align legal structures, and communicate openly with loved ones, you can help ensure a smooth transition that supports both the long-term health of the business and family harmony.
Proper planning today can prevent disputes tomorrow. With the right legal and financial guidance, you can create a will that not only reflects your values but also protects what you’ve built—for generations to come.
Privacy Policy
Terms and Conditions
Disclaimer
COPYRIGHT © 2024 MY WILL AND PROBATE
