Now throw a business into the mix and a sad death becomes unpalatable and expensive to resolve.
The facts prove that more suffer than need to. According to a Macmillan Cancer Support survey, published in January 2018, nearly two thirds of the UK population has no will, and of the over-55s, 42% are without. Further, the results indicate that another 1.5 million people have invalidated their will by marrying.
The problem is, as Emily Deane TEP, technical counsel at STEP, a professional association for practitioners specialising in family inheritance and succession planning, knows “many assume their possessions will simply pass automatically to their partner or children, or believe their assets are too insignificant to need a formal arrangement.
“But if you die without making a will, the intestacy rules will be applied, and this may not be what you want.”
Malky Chaloner, a senior solicitor specialising in wills, tax and trusts at Moore Blatch, believes that a will is an “opportunity to choose who inherits your estate upon death, and also to put in place estate planning measures to mitigate tax liabilities.” She says that a failure to have a will can lead to unintended consequences in terms of who inherits, as well as creating relationship-destroying disputes between those left behind.
The intestacy rules changed in October 2014, when the Inheritance and Trustees Powers Act came into force. Angharad Lynn, a solicitor in the private client team at VWV, says that under these rules, “if an individual dies leaving a spouse and children, the spouse will take the statutory legacy (currently £250,000) and the rest of the estate will be divided equally between the spouse and the children”.
Beyond that, as Deane explains, assets are distributed (in order) to children/grandchildren, then to parents, siblings, grandparents and finally uncles and aunts. “If you have none of the surviving relatives on the list, then your estate will go to the Crown, a situation known as ‘bono vacantia’.”
Worse still, the rules take no account of unmarried relationships and Chaloner knows that some “may have to issue legal proceedings and fight those ‘automatically entitled’ under the intestacy provisions”.
But wills have other benefits, says Chaloner. Without a will an individual is unable to leave legacies. Furthermore, “without the appropriate tax-planning that should accompany will preparation, sensible and entirely legal arrangements that can be put in place to reduce potential tax liabilities will not exist”.
Another aspect to consider – and one which will hopefully salve the conscience – is that an individual can choose executors to administer an estate after death. Lynn says that it is usual to have two or three appointed, but adds that “there is no limit on the number that can be named but the maximum number of people who can take the grant of probate is four”.
For many, it is common to appoint a spouse or children, but Lynn says “it is also worth appointing a professional who can ensure that your business assets are dealt with as you wish. This can be an individual, such as your solicitor or accountant; alternatively, many firms will have a trustee company that can act as an executor”. She says that the advantage of this is that while a lawyer or accountant may have retired (or died) when needed, the trustee company will provide continuity for the appointment of an executors, enabling partners from the firm to act.
Deane thinks along the same lines. She too suggests appointing a professional executor such a solicitor but says “you should discuss their charging costs with them beforehand”. She also point out there are other concerns: “If you have young children it would be sensible to appoint two executors to become the trustees of the children if they are under 18 years old when you die.”
In the modern world it’s understandable that Lynn says that consideration should be given to whether there are any digital assets belonging to the business that may be stored by an individual personally “and which may therefore be difficult for your executors to find”. She says to “ensure that anything belonging to the business is clearly marked as such and can be found easily”.
But for Deane, digital assets go beyond documentation, it can extend to financial products and may include bank and building society accounts, mortgage, investments, pensions, loans, hire purchase agreements, insurance, telephone and utility accounts. She says “it would be extremely useful for loved ones if you made a list of accounts and passwords they can access after your death”.
Business owners can seek protection
The effects of not having a will are potentially even more damaging to business owners. From Chaloner’s viewpoint, a will gives the power to decide who inherits shares in a company, and, potentially, depending on shareholding, who will ultimately run the company: “Without a will, shares will be distributed in accordance with the intestacy rules, which may mean persons you don’t want may end up running the company. Alternatively, it might dilute your business share so you may set up future family quarrels.”
And Lynn agrees. As she’s experienced, uninvolved family members can inherit shares directly and want a say in the running of the business, even if they do not have the skills or experience to be involved: “Using a trust means the beneficiaries would not have a direct right to any interest in the business and therefore no direct influence.”
This is also a worry for Deane: most don’t realise that if someone dies without a will, then their business assets will also be distributed under the rules of intestacy. “The consequences of not preparing a will include a business being sold and distributed under the intestacy rules; it may be liquidated and go to the government if there are no surviving relatives. And if the business ownership is attached to your home, your loved ones may become homeless,” she says.
Away from incorporated businesses, sole traderships cease on death unless there are provisions for succession. And if there is a partnership with no partnership agreement in place, the business will stop on the death of one partner. Here Chaloner advises that if there are articles of association or partnership agreements, they should be reviewed periodically to see whether they are compatible with the will provisions.
Wills don’t have to be taxing
A key concern for Chaloner is that having no will can create tax liabilities with no options for mitigation. She says that “forethought allows one to structure an estate so as to reduce liabilities quite legally by ensuring all appropriate reliefs can be claimed and options can be considered, such as the creation of trusts, which may reduce tax liabilities, or gifting the right part of the estate to the right beneficiaries to be able to claim [the right] allowances in full”.
And these allowances are valuable says Deane. She explains that the inheritance tax allowance is currently £325,000 for an individual, or £650,000 for a couple who are either married or in a civil partnership. On top of this is the Residence Nil rate Band which, from 6 April 2017 gave an additional allowance of £100,000 (£175,000 by 2020/21) to be used against a home, provided it’s left to children or grandchildren.
One allowance of particular use to business owners is Business Property Relief (BPR). Lynn says that this is available for “a business or an interest in a business, as well as land, buildings, plant and machinery used for the purpose of the business and shares in unquoted trading companies.” She says that BPR is currently awarded at 50% or 100%; it is a very generous relief and it is possible that its use will be curtailed in a future budget.
She advises clients, when planning succession, to “ensure your business will qualify for BPR. Businesses must be trading to qualify, and if the proportion of assets held in investments is too high it may not.” Lynn adds that it also important to remember that “if the business owns ‘excepted assets’ (assets owned by a trading business but not used in the business) the value of these will be deducted from the value of the business and they will not benefit from relief”.
If there is any doubt whether the business assets will qualify for BPR, or if the business owner is concerned that BPR may be curtailed, a trust can be useful. As Lynn advises, “on the death of the business owner, the beneficiaries can ascertain whether the business assets will qualify for BPR. If it applies, then under s.144 of the Inheritance Tax Act 1984 the trustees may decide to transfer the assets out to the children and wind up the trust.
“No inheritance tax will be payable. But if the shares do not qualify, the assets could be transferred out to the spouse, again ensuring that no inheritance tax is payable.”
Both Chaloner and Lynn agree that wills should be reviewed at least every five years, to ensure they still reflect the likely estate and there has been no change to wishes. Deane is more exacting and suggests annual reviews. Even so, Chaloner says that “they should also be reviewed on major life event such as marriage, divorce, births of children, grandchildren, or the creation of a business”.
Lynn highlights a concern for divorcees: that after divorce a will is still valid “but the former spouse is treated as having died on the date of decree absolute.” She suggests individuals in this situation review their will as this may lead to a partial intestacy. Deane puts it another way: “Any provisions that include your ex-spouse will be excluded from your will and any gifts made to your ex-spouse will fall back into your estate to be divided among the other beneficiaries.”
To this list Chaloner adds that when there are major changes in the law, such as when the transferable Nil Rate Band was introduced or when the ‘new’ Residence Nil Rate Band was introduced, any will drafted prior to those changes should be checked. “Failure to do so may mean your wishes aren’t effective and/or unforeseen tax issues may arise,” she points out.
Lynn thinks that regular reviews will ensure that company documents, such as articles of incorporation and shareholders’ agreement, accord with the wishes set out in a will. “For example,” she says, “some family businesses may only allow shares to be passed to direct descendants of the founder. A spouse or stepchildren would not be included so if a will leaves company shares to a spouse, but the company’s constitution does not allow this, the gift will fail.”
By extension, Lynn adds that it is just as important to ensure that business documentation does not prevent an estate from benefitting from BPR: “If company documentation includes a binding contract for sale whereby the deceased’s shares must be sold to the surviving directors or partners, then BPR will not be available.”
A solution to this problem that she highlights is a ‘put and call’ option, giving each side the option to sell or buy, but without any obligation.
Choosing the will writer
Selecting a will writer requires care to be taken. While it is possible for an individual to write their own will, as any good lawyer knows, tailored advice from a specialist qualified in wills, tax and trusts will reign supreme. Chaloner highlights the value of qualified advisors who “are able to consider the entirety of your estate, and also draw upon experience in structuring your estate so as to avoid pitfalls.” Her advice is plain: choose an advisor who has further specialist training which suits your requirements, who ideally is a member of the Society of Trusts and Estates Practitioners (STEP), who has expertise with different sectors or business structures, cross border and international estate planning, or who is a Chartered Tax Advisor (CTA).
From Deane’s perspective, she too recommends finding “someone who has specialist qualifications and expertise and adheres to high professional standards”. Naturally, she would look to full members of STEP, who are known as TEPs.
And the international aspect of an estate that Chaloner refers to shouldn’t be forgotten. On this Deane explains that, “if you have any property in another country, you should consider what the law of that country says about who will inherit the property on your death. Many countries have set rules on this. If these rules are undesirable, then you may need to take legal advice or make a will in that country.”
A will is often not thought about. Whether that’s through time pressures, no desire to think about the inevitable or a misunderstanding of the law with an assumption that an estate will go to the right destinations, not having a will is fundamental part of personal planning that is so easy to fix.
From Angharad Lynn A man in his 40s died without leaving a will: “A business owner had not made any provision for what would happen to the business when he died. He was not married to his long-term partner so she will receive nothing under the intestacy laws. The deceased’s elderly father is his sole heir under the intestacy laws and has no knowledge of or interest in the business.” Lynn says that it is proving really difficult to find all the information we need, and in particular there are creditors of the business that will need to be traced.
From Emily Deane who quotes lawyer Stephen Lawson “I recently represented the long-term partner of a very successful businessman. They had been together for over 20 years. He knew that he was dying of an incurable disease. He had advice from a solicitor that he should make a will, but refused to sign one. When he died without a will, none of his estate went to his long-term partner, but instead went to the children of his former wife.
“To say that disagreement erupted between family members was an understatement. Court proceedings had to be commenced for reasonable financial provision under the Inheritance Act 1975. The close family who one year were sharing Christmas dinner around a dining room table found themselves the next year arguing around a lawyer’s table.”
Considering a will
Preparing a will when a business is involved
Decide who is best placed to run a business and leave the business to them. Alternatively, set up a family trust so that those best placed will succeed. A will might specify that a person, possibly a third party, is to run the business, but the proceeds are then shared in particular proportions or among specific categories of beneficiaries to be considered by trustees in future.
An alternative is to provide for a ‘first refusal’ option where the surviving business partners have the opportunity to purchase the shares of the deceased partner in priority over anyone else coming into the business.
If shares are being left to minors, consideration should be given to guardianship issues to ensure that there are not future family disputes.
Great care must be taken when placing assets into a trust. While it can reduce tax liabilities on death, it means they may be no longer available or accessible in life to the donor. If set up improperly they may cause HMRC to investigate or prevent the claim of reliefs that might be available otherwise.
As to what to include, thought should be given to drawing up a comprehensive list of assets; and if business assets are part of the estate, relevant documents (such as partnership agreements and articles of association) relating to the holding with an estimation of value.
There should be a list of intended beneficiaries including, if they are minors, their ages; any potential dependants and particular family circumstances; and if persons are being left out of a will, detail of who they are and why they are not being included in any will.
Thought should be given for whom might want to administer the estate as well as consideration of any last wishes. It’s also worth thinking about what would happen if any named beneficiaries were to die first. Also detail any potential charities that might benefit from the estate.
It is vital that when preparing a will all assets are considered. It is perfectly possible to leave the ‘residuary estate’, to an individual, but care must be taken to ensure that doesn’t cause unintended consequences and/or create family rifts. For example, if it has always been said a child is to inherit a particular piece of jewellery or land, that should be set out.
Draft a letter of wishes
If a trust is to be included in a will then there should also be included a letter of wishes to be stored with the will, giving guidance to the trustees about how it is envisaged the trust is used after death.
A letter of wishes is not legally binding, and it is important to state that it is not intended to fetter the discretion of the trustees. However, the letter can explain to trustees how it is hoped the capital and income of the trust fund will be used after death. For example, it may be preferred that any income distributions to children are dependent on whether they are involved in the day-to-day running of the business. Some may wish to give trustees some criteria for paying income, or indeed capital (subject always to their discretion). In the absence of any guidance (which should primarily be about the types of issue trustees might bear in mind, such as housing need, financial circumstances), the trustees would probably feel obliged to treat the beneficiaries equally.
It is also possible to leave instructions in a letter of wishes about the sale of the business and who may want to buy it and address issues such as who will manage the day-to-day running of the company until the sale is completed and who the preferred buyer might be.
Make sure assets can be left by a will
Assets held jointly with a spouse can be owned in either of two ways. They can be owned as joint tenants or tenants in common. This is true for all assets, from a family home to shares in a business. If an asset is owned as a joint tenancy, it will pass outside a will, by the law of survivorship.
This means that if the shares in a business are held with a spouse as a joint tenancy, they will pass automatically to the spouse on death and not by the will, regardless of the provisions of the Will.