Where there's a will

Death and taxes - the two things we all have to look forward to. With this in mind, have you considered your position in the event of the death of a director, partner or shareholder in your business? What are the rules that will affect your position should a colleague unexpectedly die?

Inheritance tax is charged at 40 per cent on the value of an individual's estate on death, but it can also be charged on the value of property held in a trust. Inheritance tax is also charged at 20 per cent on some lifetime gifts.

There are many different reliefs and exemptions from inheritance tax - most people are aware that transfers between spouses or civil partners are generally exempt.

Transfers during lifetime to other individuals are potentially exempt, but inheritance tax may become chargeable if the donor does not survive for seven years from the date of the transfer. From a business perspective, the main relief is Business Property Relief (BPR) for business assets.

BPR is available for trading businesses that have been owned for at least two years, and is very valuable. The relief is 100 per cent of the value of an unincorporated business, an interest in a partnership; shares in an unquoted company, or securities in an unquoted company controlled by the owner.

For shares or securities in a quoted company controlled by the owner or assets used by a company controlled by the owner, or by a partnership in which the owner is a partner relief is 50 per cent. As you'd expect, there are some exceptions.

Make a will

The most basic and essential requirement, especially for those in business, is to make a will. If a person dies without a will (intestate), the law specifies how their assets are dealt with. This can cause great difficulties for surviving family members. Where shares or other business assets are held, it can also affect business partners, directors, other shareholders and the business itself.

In addition to making a will, business partners and shareholders may also need to make other arrangements to deal with their partnership interest or shares.

The most straightforward situation is that of a family-owned business. Here it will normally be sufficient simply for the will to specify to whom the shares or other business assets are to be transferred, and to ensure that BPR is maximised.

Where the individual is in a partnership, or is a shareholder in a company with other partners or shareholders who are not family members, additional arrangements will need to be made.

The articles of association of most private companies include 'pre-emption rights', which provide that shares must first be offered to existing shareholders before they are sold to a third party.

This will enable other shareholders to acquire shares from the personal representatives of a deceased shareholder.

More specifically, a separate shareholders' agreement can set out the exact wishes of all shareholders with regard to matters such as the purchasers of any shares that become available, a formula for arriving at the purchase price and how a purchase will be funded.

Where possible, wills should be structured so that assets which qualify for BPR are left to non-exempt beneficiaries. Otherwise the relief could be wasted.

The introduction in October 2007 of transferable nil rate bands for spouses and civil partners has reduced the need for sophisticated planning in most cases where the value of joint estates is less than £624,000.

Insurance can also play a part in meeting eventual inheritance tax liabilities and it can also enable the interests of deceased partners or shareholders to be bought out. Any such arrangements should be structured with the benefit of specialist tax advice.

Nicholas Hughes is head of Trusts and Estate Planning at Chiltern Tax Support for Professionals​

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Inheritance tax on death

John, a freeholding publican, died in May 2008. His shares in the pub were valued at £1m, and the remainder of his estate was worth £1.5m.

He left his shares to his adult son (who took over the running of the pub), £500,000 to his daughter, and £1m to his wife. John had made no gifts in the seven years before he died.

Assuming that all conditions for Business Property Relief are met, 100 per cent relief will apply to the shares, and no inheritance tax will be payable on those.

The residue of £1m passing to John's wife is covered by the spouse exemption, but some tax will be due on the bequest to his daughter. The amount on which inheritance tax is charged is £188,000 (£500,000 less the nil rate band of £312,000), and the tax due, at 40 per cent, is £75,200.