Business Estate Planning – Share Agreements

What will happen to your business in the event of your death?

 

“There are only two things certain in life: death and taxes” 

 

With this in mind, business owners should have plans and strategies in place in the event of death during their working life to ensure both the business and/or the family left behind will be protected.

 

What is a Share Agreement?

The first place to start is by putting a share agreement with your business partner(s). This is a formal agreement that will be enacted in the event of death and it will dictate what happens to each of your respective shares of the business.

 

Buy/Sell Agreement

This is a predetermined agreement in place for the surviving business partner to buy your share of the business from your estate. The estate is forced to sell the shares in this instance and the business partner is forced to buy the shares.

 

This will give you comfort that your family will receive large payment in the event of your death.

 

Careful consideration needs to be given here as to whether you want your next of kin or children to maintain the option of continuing in the business – if you want to have this option, you may wish to explore the inclusion of a double option.

 

Double Option

Your next of kin has the right to maintain the share in the business but also has the right to sell the share. The sale cannot be blocked.

 

Conversations with your business partner must be had to find out if whether they would be happy for your next of kin or child to become part of the business as this can be a bone of contention with business partners.

 

This may also have implications with regard to business relief for the beneficiaries of the shares so this also needs to be taken into consideration.

 

 

 

How will this agreement be financed?

There are a number of life assurance options that can be put in place where the proceeds of the policies can be used to carry out the share agreement.

 

Life of Another

You can take out a life assurance policy on the life of your partner.

The proceeds will be paid out tax-free in the event of their death and can be used to purchase shares from the deceased’s estate.

 

The age of the business partner should be considered as it will cost more if they are older.

The number of business partners and potential future partners should also be considered as it could mean a number of different policies need to be taken out.

 

There is no tax relief on these premiums either and they will be treated as BIK or drawings if paid from the business or partnership.

 

Life In Trust

You take out a policy on your own life and name the beneficiaries in the event of death.

The beneficiaries will receive the proceeds tax-free if used to carry out the business agreement.

 

This is a fairer structure from a cost point of view as everybody will be paying costs relevant to themselves.

 

Corporate Share Holder Protection

The company takes out the policy and uses the proceeds to purchase shares.

This is a very tax-efficient structure as there is no BIK and the cost is a legitimate trading expense for corporation tax purposes.

 

 

Final Comments

As you can see this is a really important area and advice should be sought to ensure you have the appropriate structures in place which will protect the business and your family in the event of death. There are other considerations such as the Capital Acquisitions Tax (CAT) and Capital Gains Tax (CGT) liabilities which would also need to be taken into account.

Contact us if you would like to arrange an appointment with one of our advisors to find out more information about how to put the correct protection policies in place.