Business Succession Planning & Share Protection Arrangements

Many business owners work hard to build up their business and make it a success often failing to then plan for what should happen with the business upon their death.

The importance of preparing a Will when reviewing your succession plans is vital and seeking professional advice about the various share protection schemes is crucial to ensure that the two dovetails to guarantee that your wishes can take effect.

Share protection schemes and the importance of putting plans in place

If a business owner dies without any share protection in place, then typically the shares in the business would pass to their personal representatives. The outcome of this may not be favourable for the business itself and may not make the most of any tax reliefs available to the deceased’s estate.

If the business has model articles in place, then it is important to note that these articles do not contain any pre-emption rights, also known as a right of first refusal. This will mean that the shares would pass to the deceased’s family which could result in the surviving business owners losing control of the business. The personal representatives would become entitled to any dividends, profit share and have rights attaching to the shares themselves i.e. rights on winding up.

Business owners should therefore consider succession planning and the benefits of shareholder protection plans. This type of planning can prevent the shares from being inherited by an unwanted beneficiary and avoid the disruption and upset that may be caused by the uncertainty for both the surviving business owners and the deceased’s family members.

A share protection arrangement enables the surviving business owners to purchase the shares from the estate and provides a cash sum to the deceased’s family which is often what the parties on both sides want.

It is very important that the business owners review their intentions and agree on what should happen in the event of the death of one of them.

They should consider:

How we can help

There are several share protection schemes that our Corporate team can offer guidance on. We can then assist by preparing any Trust documentation that sits alongside them to ensure that cash generated by the protection plan is directed to the right people.

At the same time, the business owner needs to review their Will to make sure that their shareholding passes into a Will Trust. A Will Trust crystallises any Business Property Relief (BPR) that may attach to the shares which could be as much as 100%. This ensures that the benefit of the BPR is not then lost when the cash payment is made to the estate which would be subject to inheritance tax in its entirety on the beneficiaries’ subsequent death.