Business Planning 101: How to Pass on an Owner-Managed Business

Today, there is plenty of information online regarding inheritance tax and how to arrange your affairs in a way that means your loved ones are well looked after. But, what about business planning? As a business owner, what happens to all your hard work once you pass away?

Now, you may have to pay 40% inheritance tax (IHT) on chargeable assets above the ‘nil rate band’ of £325,000. At Newnham & Son, we believe you should be able to leave your legacy to others without having to face such high charges. With this in mind, we’ve created this article. In it, we explore the various options business owners like you have when it comes to estate and business planning in Petersfield.

Sole Trader Business

If you’re a sole trader, the assets of your business are personal. As a result, they fall into your estate when it comes to IHT. Upon death, your executors could sell your business but they would pay this into your estate in cash. In this case, your employees could have a redundancy claim against your business.

Partnership or Limited Liability Partnership (LLP)

When it comes to a partnership or an LLP, a limited liability partnership member’s or active partner’s capital account is important for the business. Upon death, this counts as a business asset and may even qualify for IHT business property relief (BPR). However, while this is the case, you must satisfy all BPR conditions.

In addition to the above, property that you own and that you use for the business could be eligible for BPR relief in these instances. It’s worth mentioning that the death of a partner can cause cashflow issues. With this in mind, consider using life insurance to make repayments of capital accounts. Alternatively, a small pension fund could help you purchase the business property to ensure its continuation.

business planning partnership

Limited Company

Shares in a limited company can qualify for BPR for IHT if you can meet certain conditions. Normally, shares in a limited company qualify for IHT. That said, with BPR you can transfer the shares during your lifetime or upon death free of inheritance tax.

Qualifying Conditions for Business Property Relief

As mentioned above, there are certain conditions you must meet to qualify for BPR if you own a family business or an owner-managed company. The first one is that you must own all shares for at least two years before death to qualify. Furthermore, your company must carry on as a trading business rather than an investment one. This means that BPR isn’t available if your company deals mainly in shares or stocks, buildings, land, or securities, for example.

Additionally, some of your assets will not qualify for BPR if you don’t use them mainly or wholly for the purpose of the business for the past two years. They also won’t qualify if you no longer need them for the business in the future. This includes large quantities of cash.

Last but not least, BPR isn’t available if the shares of your company are subject to a binding sale contract. With this in mind, check that any shareholders’ agreement doesn’t result in a binding contract that could cost you your BPR.

Get Business Planning Advice in Petersfield From Your Local Accountant

When it comes to business planning, estate and inheritance tax planning should be at the forefront of your decisions. It’s essential that you put in place a succession strategy to avoid losing your BPR. Your plan should dictate where your shares will go on death in order to save your estate significant amounts of IHT.

If you would like to find out more about estate planning or IHT for business owners in Petersfield and its surrounding areas, contact N&S today. One of our friendly team members would be happy to run you through your various options so that you don’t end up paying more tax than you have to.

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