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Protecting your interests

We are all too familiar with the Benjamin Franklin quote “Nothing is certain in life except death and taxes.” However, this does not prevent most of us from carrying on as if we were immortal.

Take the example of a typical small or medium sized business owner. Often they are far too busy dealing with the challenges they face at any particular moment in time to give serious consideration as to what would happen if they were not around.

So, what actually happens to a business upon the death or serious illness of one of the key stakeholders? The answer to this question will occasionally lie within a company’s articles of association, or within a partnership or shareholders’ agreement. However, all too often this has not been considered. If no agreement exists then overnight a deceased stakeholder’s beneficiaries will become your new business partners and you have no absolute right to purchase their share even if you have the capital to do so. The results of this can be dramatic and may ultimately result in the failure of the business.

Ensuring that you have solid plans in place to deal with all possible eventualities should be paramount for any business. In doing so, the following three distinct elements should be considered:

  1. A written agreement covering the circumstances in which and how the share of a business should be transferred;
  2. Any necessary compensation, including the source of any required funds, and;
  3. Documentation so that transactions are completed in the most tax efficient manner.

It is generally advisable to put insurance arrangements in place to cover any required compensation. This negates the surviving stakeholders having to attempt to raise capital from either the business or their own personal resources.

To ensure the proceeds from any insurance policy are distributed to the right beneficiaries and that tax is deducted correctly, a suitable insurance policy should be subject to a business trust, which will also allow for any future changes in stakeholders. By considering a business trust and exactly how the regular premiums are met and by whom any unintended tax charges can be avoided.

Option arrangements are also often preferable to other forms of agreement. This is due to the fact that they are not binding contracts for sale and as such qualify for Business Property Relief for inheritance tax purposes.       

If you would like to consider implementing shareholder protection or would like to discuss any of the points raised in this article in greater depth, please get in touch with me or your usual contact at Mercer & Hole.

 

 

Date: 17th February, 2016
Author: Michael Lapham

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