Sarah Nettleship, Senior Associate in Wills, Estate & Tax Planning at Thomson Snell & Passmore, highlights the essential steps wealth advisors and RIAs should help business owners take to secure their legacy in light of the October 2024 Budget's changes to inheritance tax (IHT).
Many business owners are so focused on growth and operations that they often overlook estate planning, putting their business's future at risk when they are no longer there to lead it. The recent revisions to the previously favorable IHT framework for businesses have made succession planning even more critical.
Key Considerations for Business Owners
The Necessity of a Will
A will is the cornerstone of estate planning. It enables business owners to outline how their assets—including business holdings—should be distributed upon death. It also allows them to appoint executors responsible for overseeing the allocation of assets in accordance with their wishes.
Before the October 2024 Budget changes, unquoted shares in a trading business could qualify for up to 100% relief from inheritance tax through Business Relief (BR) (formerly Business Property Relief). However, BR is now capped at £1 million, with any value above this threshold subject to a 20% IHT rate.
Despite this cap, BR remains valuable. Advisors must urge clients to review and update their wills to ensure optimal tax planning while mitigating potential administrative hurdles. A well-structured will can help business owners make full use of available reliefs while ensuring a smooth transition of assets.
Lasting Powers of Attorney (LPAs)
LPAs are essential for business owners, as they provide a legal mechanism for appointing individuals to manage financial affairs in the event of incapacity due to physical or mental health issues. For business owners, this step safeguards continuity of operations.
Without an LPA, the court may need to appoint a Deputy to handle the owner's affairs, a process that can be lengthy, expensive, and misaligned with the owner's intentions. Advisors should also review partnership agreements, articles of association, and shareholder agreements to ensure that the LPA does not conflict with these governing documents. This alignment prevents operational deadlocks and disputes.
Lifetime Gifting and Succession Planning
The October 2024 Budget has also underscored the importance of early succession planning and lifetime gifting. As businesses evolve, particularly those transitioning from trading to investment-oriented activities, their eligibility for BR may be compromised.
Where businesses are likely to be sold or liquidated before the owner’s passing, BR may not apply at all. In these scenarios, structured lifetime gifts become a valuable strategy. Properly timed and executed, these gifts can facilitate a smooth transfer of wealth while potentially reducing IHT exposure. RIAs should work closely with clients to map out and implement these gifting strategies, ensuring they align with both financial and family goals.
Cross-Option Agreements
The changes to BR highlight the importance of ensuring that shareholder agreements, company articles, and partnership agreements are carefully drafted to preserve BR eligibility. Many agreements contain pre-emption rights that, if improperly structured, can be interpreted as an obligatory sale of shares upon an owner’s death—disqualifying the shares from BR.
A cross-option agreement can resolve this issue by giving surviving business partners the option to buy the deceased owner’s shares rather than a mandatory obligation. The agreement only becomes binding when the option is exercised, preserving BR while still providing flexibility for an eventual buyout.
Business Protection Insurance
Business protection insurance plays a pivotal role in funding the buyout of a deceased owner's shares or partnership interests. These policies are typically assigned to a business protection trust, which helps ensure the transaction is tax-efficient.
Following the inheritance tax changes, advisors should recommend that clients reassess their insurance coverage. In addition to funding the purchase of shares, insurance policies may now need to cover any IHT liability that arises due to the new BR cap. Ensuring adequate coverage can prevent financial strain on the remaining business owners while protecting the company’s financial health.
Holistic Succession Planning: Action Steps for RIAs
Will Reviews and Updates: Encourage business owners to review their wills regularly to reflect changes in tax laws and their business structure.
Implement LPAs for Continuity: Ensure clients establish LPAs that align with their business agreements to avoid conflicts and operational disruptions.
Evaluate Business Structure for BR Eligibility: Advise clients to monitor shifts in their business activities that could affect BR eligibility, particularly transitions from trading to investment models.
Incorporate Lifetime Gifting: Work with clients to design gifting strategies that support their succession goals while minimizing tax liabilities.
Adopt Cross-Option Agreements: Help clients implement cross-option agreements to preserve BR and facilitate a smooth ownership transition upon an owner’s passing. Review Insurance Needs: Reassess business protection insurance to ensure it covers both the cost of share buyouts and any potential IHT obligations arising from the new BR cap.
Guiding Clients Through Complex Transitions
The 2024 Budget changes have reinforced the importance of proactive estate and succession planning for business owners. RIAs play a crucial role in helping clients navigate these complexities by crafting tailored strategies that safeguard their legacy and minimize tax exposure. By taking a holistic approach, wealth advisors can ensure their clients' businesses thrive for future generations while mitigating financial risks and preserving value.
