Business issues: planning for the future
Would you really want to work with, or for, your mother-in-law? Robin Bates of Bulley Davey Wealth Management considers how you could unwittingly end up doing so!
Life as an accountant is never dull
In contrast to popular perceptions, it’s not just about the numbers, but also helping to solve people’s problems. A young, unmarried couple recently visited us looking to start up their first business together. We soon discovered neither of them had a Will or had investigated putting agreements in place should one of them pass away. Of course, planning for their own or their partners’ death probably wasn’t their highest priority. However, it can be very important when entering into a business arrangement.
Surprisingly, it didn’t seem to concern them…
…Until I asked them ‘would you like to go into business with your mother-in-law?’ The mother-in-law caricature is infamous for being interfering and annoying – not the best personality to go into business with! While I am sure that this is far from reality, it does get people to really think about succession and inheritance planning for their business. Let’s look at the facts. If a company’s Articles of Association document doesn’t stipulate what should happen on the death of a director or shareholder, then the shares of the company will pass under the terms of their Will. If a person passes away and has not left a valid Will their estate will be shared out according to our government’s rules of intestacy.
Under these rules, only married or civil partners and some other close relatives can inherit the estate. Where the person is not married and does not have any descendants their next-of-kin is deemed to be their parents. As the young couple weren’t married and had no children the whole of their estate would be shared between their parents if they died, including their company shares. This means that the surviving partner could potentially become business partners with their parents-in-law, whether they wanted to or not. Or, if the deceased partner had the majority share, the parents would effectively become the boss of the surviving owner!
Where there’s a will…
Of course, even if a business partner does have a Will, he/she may have left their estate to their partner, children, relatives or friends, which means that the survivor can still end up with an unwanted business partner or boss. It is, therefore, probably in the owners’ interest to investigate taking steps to protect their businesses. As they were forming a limited company, the young couple’s constitutional document, known as the Articles of Association, was fairly basic and hadn’t stipulated what should happen if one of the directors/shareholders passed away. This document supersedes a Will and can ensure that all directors or shareholders are treated equally – this is particularly helpful in a business with multiple directors.
Articles of Association
The Articles of Association or Shareholders Agreement can be drafted to address what will happen in the event of the death of one of the shareholders/directors. The usual method is the system of a “put and call option” but not a contract for sale, which would impinge on inheritance tax relief on the value of the shares. The beneficiaries of the deceased and the surviving owner can therefore call in these options to effect a transfer at value. The business or other shareholders/ directors may need to put in place measures to cover the cost of buying these shares, such as a life policy or bank loan. These should be discussed with your accountant or independent financial adviser who works closely with your accountant. After these arrangements have been put in place, they will need to be reviewed regularly to make sure they are still fit for purpose and reflect an increasing value of the business. Working with us, our chartered financial planners and our legal partners, we are now working with the young couple to put these in place and we are advising on maximising other areas of their business.
Death isn’t a topic anyone wants to consider…
… But when it comes to business it is important to make sure everything is set up to deal with all possible eventualities… unless you really do want to end up working with or for your mother-in-law! your mother-in-law!
1. Speak to your accountant and financial adviser about reviewing your Articles of Association and Shareholders Agreements.
2. Ensure agreements are put in place to protect your business. Make sure they are checked by your accountant so you don’t end up with a high tax bill!
3. Review these agreements regularly with your accountant to make sure they are fit for purpose.
4. Make sure you have a Will in place to ensure your estate is left to the right people.
Bulley Davey 4 Cyrus Way, Cygnet Park, Hampton, Peterborough PE7 8HP. 01733 569494, www.bulleydavey.co.uk