Ellen Eunson
- Director
Insights | Power of Attorney
Securing the future: succession planning for business owners
16 July 2024
It’s never nice to think about the possibility of premature death or long-term incapacity, but anticipating the unexpected is vital for business owners. Without the right planning, unforeseen circumstances can disrupt the trajectory of a business, sometimes with disastrous consequences. Business owners should have clear plans in place for the continuity and succession of businesses, regardless of size and structure.
A good starting point is to consider what you would like to happen to your business if you were no longer able to lead it – who would own it and who would manage it. Being well prepared not only protects the interests of the business, but also alleviates the burden on family members and successors during times of crisis.
Once you have a vision for the way forward, the next step is to formalise your wishes legally. Alarmingly, around 60% of people in Scotland have not got round to making a Will. That’s understandable – nobody wants to think about the subject – but if you own a business, you should make it a priority.
Businesses can operate in various forms, including sole traders, companies and partnerships, all of which should be considered differently in succession planning. Depending on how your business is set up, formalising your succession plans may mean making a Will is all that is needed, but it may also be necessary to update your partnership agreement or company Articles of Association to align with your succession plans and Will.
In Scotland, matters are complicated by the existence of legal rights. The spouse and children of a deceased person hold automatic claims to their ‘moveable assets’, a term which refers to everything in their estate apart from land and buildings. This includes any businesses and in the case of partnerships and companies includes any land and buildings owned by them, so claims can be substantial.
Inheritance tax liabilities should be considered carefully during the succession planning process. At present, if your total estate – including the value of your business – is likely to be over the inheritance tax threshold, which has been frozen at £325,000 since 2009, it’s also worth taking expert advice on inheritance tax. While certain reliefs are available to businesses, including business property relief, and, for farms, agricultural property relief, the rules on how these apply are complex and specialist advice should be sought. Planning ahead will allow you to pass more of your hard-earned assets on to your chosen successors, rather than the taxman.
Failure to address these legal and tax intricacies can result in unintended consequences. For example, if you have a child who you do not want to inherit your business, but you have not provided for this clearly from a legal perspective, that child may have the right to claim part of the value of the business, or your family may be left with an unexpected inheritance tax bill. Either of these may impact on the viability of the business.
Beyond legal and tax considerations, openness and honesty are essential for effective succession planning. Business owners should always talk frankly with their potential successors, to confirm they are aware of their plans and that they agree to take on the business if necessary. After all, nobody wants to leave their business to someone who would rather not have that responsibility.
In cases where successors are young children, appointing interim caretakers or guardians is essential until the children are old enough and mature enough to take over.
To help protect the business in the event of owners losing mental capacity, a Power of Attorney should be put in place to allow someone else to step in.
Once succession plans are in place, business owners should reevaluate them at least every five years, and following any significant life events such as births, deaths, marriages, or mergers or changes to tax regimes.
Seeking professional guidance from a legal advisor can address any uncertainties and provide peace of mind. People are often put off consulting a solicitor because they worry about cost, but initial consultations are often free of charge and provide insights into risk management and legal requirements. Failing to formalise your wishes can also mean increased legal costs longer term. Even if you already have a succession strategy in place, but are unsure if it is sufficient, it’s a good idea to consult a legal specialist.
If you would like any more information or support, please get in touch with Ellen Eunson.
Versions were published in –
- The Orcadian Online: Securing the future: succession planning for small businesses – The Orcadian Online
- The Orcadian | Facebook
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