For most business owners, their business is not just another asset in the estate – it is the product of years of hard work and investment, and often has significant sentimental, as well as economic, value. Effective estate planning for business owners means balancing the wish to pass that legacy on to the next generation in an appropriate and tax-efficient way with the need to protect the continuity and reputation of the business itself. A well drafted will is key, but it is only one piece of the puzzle – a joined up approach is essential to ensure that the succession and business plan work together.
Choosing the right successor
The first question is, of course, what should happen to the business following the death of the owner and who should inherit the business if there is a desire for the business to continue following death. Whilst this may seem obvious, there are many practical considerations which need to be worked through to protect both the beneficiary and the business.
Will the proposed beneficiary be able to take the business forward or will additional support be needed in the short term? If more than one person is involved, will they work well together or is there any risk of a deadlock scenario if they are unable to make decisions? Is an outright legacy of the business appropriate or could that expose the business to risks, such as a claim on separation or divorce, creditor claims or poor decision-making by the beneficiary? Family dynamics should also be worked through in advance. If one child is to inherit or control the business, how are the other family members to be provided for? Alternatively, it may be that the business is to be sold, whether on the open market or to someone else involved in the business.
Addressing and planning around these points early can reduce uncertainty at an already difficult time, limit the risk of disputes between family members or business partners, and help the business to continue smoothly following death.
Making the documents work together
A common pitfall is to assume that company shares or interest in a partnership will pass to the chosen beneficiary(ies) named in the will. However, the business’ governing documents (i.e. the company articles of association, shareholder’s agreement or partnership agreement) may dictate what happens to the shares or partnership interest on death and override the terms of the will.
The governing documents may, for example, require a compulsory transfer to the surviving shareholders or partners, or give them the first right of refusal to acquire the interest before the value can pass to the intended beneficiary. Historic or standard form articles or agreements can also contain outdated provisions which no longer reflect the business or family circumstances, or anomalies which create uncertainty and reduce the practical usefulness of the documents.
Reviewing these documents is therefore essential to ensure the succession plan can be delivered in practice.
Managing family claims
In Scotland, legal rights can disrupt the succession plan for the business without careful planning. Legal rights are a form of forced inheritance in Scotland which entitle a surviving spouse or child to claim a fixed share of the deceased’s net moveable estate, regardless of the terms of the will or the business’ governing documents.
This is particularly important for business owners because their shares or partnership interest will generally be included in the legal rights calculation and, depending on how ownership is structured, this may also include the value of land and buildings within the business. Crucially, legal rights are a right to cash from the estate, not a right to specific assets. This can therefore create cash-flow pressures for the business unless there is sufficient liquidity elsewhere within the estate to meet such a claim.
The exposure to legal rights can often be mitigated through careful lifetime planning, but a holistic approach is essential to ensure that the planning works in the round and does not create any unintended tax, business or succession consequences.
Planning for inheritance tax
A crucial part of the estate plan is to plan for inheritance tax (IHT) in the event of death. Where IHT is payable, the family and business may face cash flow issues if there are no other assets within the estate to pay that tax.
Many businesses qualify for relief from IHT, known as business property relief (BPR). This broadly applies to businesses which are wholly or mainly trading and not investing in land and assets. The rules around BPR have changed significantly from April 2026. The first £2.5million of qualifying business property will attract 100% relief but the excess value will now receive 50% relief, creating an effective IHT charge of 20% on the value over £2.5million. For spouses and civil partners, unused allowances may be transferable, potentially allowing up to £5million of qualifying assets to pass with full relief, but this will only assist where the ownership and estate planning are structured appropriately.
This makes advance planning more important than ever. Business owners should review whether their business qualifies for relief, whether the value of the business exceeds the available allowance, and whether wills, shareholder or partnership agreements and lifetime planning are aligned to make best use of the reliefs available.
Planning early
Taking early expert advice is crucial to identify and address any problems that may disrupt the succession and business plan. With the right planning in place, business owners can reduce uncertainty, limit the risk of disputes and support a smooth transition of the business following death.
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