The thorny issue of succession to the family business - managing expectations and making choices that are right for the business - can become even more complicated if the correct due diligence on your Will and business documents are not undertaken during your lifetime.

Problems may arise if you do not check the provisions of your partnership/ company documents carefully to ensure they comply with the wishes in your Will. It is also critical to ensure that you know which assets are owned by you personally and which are business assets, as the distinction can cause problems if you get it wrong. Property, private client and litigation solicitors will all have experience of how issues of ownership (as opposed to benefit of occupation) where there is a business, can become lost in the mists of time.

Consider the following examples:

  1. You leave a gift of your family company shares to your husband in your Will. On your death it comes to light that there is a clause in the company documents that says shares can only be left to direct descendants of the founder. The gift to your husband fails.
  2. You leave a gift in your Will of some buildings to your daughter which you are hoping she will be able to get planning permission on and develop and sell at a profit. After your death it transpires that the buildings are actually an asset of a family partnership in which you are a partner and you are not able to control their destiny via your Will. The partnership was formed many years ago and the original agreement omits re-valuation provisions so that your business partners (your nephews) have a right to buy your partnership share, including your interest in the buildings, from your estate at their original cost rather than their current value. Your daughter misses out on the value you had planned would pass to her.
  3. You leave your company shares to your wife in your Will thinking that your house is an asset of the company. You leave everything else to your son from a previous marriage. On your death it comes to light that the house is not a company asset at all and it passes to your son (who does not get on with your wife) which was never your intention.
  4. You leave a specific legacy of your interest in an extended family partnership to your son and daughter equally with the intention that they will become partners in the business. On your death the partnership agreement is consulted and its provisions do not allow you to pass on your partnership share in the way you envisaged; the surviving partners have an option to buy your children out of their interest and so they may only receive cash rather than become partners themselves. You are dependent on the other partners doing the necessary to achieve your aims – your children have no legal rights to become partners.

It may of course be possible to carve a path through these oversights by agreement between the affected parties, but if there are underlying tensions or conflicts within the family the consequences can be far reaching.

Issues that need to be addressed to avoid problems arising on death:

  • Are your governing documents up-to-date, in line with your wishes and in accordance with your Will? Businesses evolve and develop over time and what was right previously may change. All business documents should be reviewed regularly in conjunction with your estate succession plans.
  • Have you had a frank and open discussion with the members of your family business to address issues of succession and manage expectations or concerns? Doing so may avoid disputes and family tensions.
  • Will the value of your business create an Inheritance Tax (IHT) charge in your estate? While Business Property Relief (BPR) and Agricultural Property Relief (APR) may be available, there are many instances where they are not. A review of the assets and structure may present opportunities to bring the business interest within the scope of the IHT reliefs.
  • You need to consider who will run the business while your estate is being administered. Have a discussion with your family business members to ensure you have the correct provisions in place to comply with your wishes.
  • How will the business be funded after your death? Banks may typically freeze overdraft or loan facilities when a business owner dies. Is there sufficient cash to keep the business afloat during the estate administration period so maintaining the value for a future sale/transfer?

If you make no specific provision in your Will, then any business interest that you own, whether an interest in a partnership or a company shareholding will fall into your residuary estate or pass under the intestacy rules if you have no Will. It will not automatically pass to the surviving owner(s).