As you make plans for your fishing business (or any business), you identify and manage risks. Given recent developments we are sure you have thought a lot about health risks and the financial impact, as well as the family and business continuity. While we cannot control many of these uncertainties one thing you can do is take control of your personal affairs and make plans for the future now. As part of this you should plan for the risk of disruption to the business by the four ds – death, debt (tax), divorce or disability (incapacity).
If you died, who would step into your role in the business? Can plans be made now to identify and bring in that successor? If you are the sole director and shareholder, extra planning may need to be done so your executor can take control of the business after your death.
Writing your will allows you to take control of who that executor is, and who will inherit your shares in the business. You may want your business to go to your family or you may want the business to be sold, on the market or to someone else in the business. If you have chosen one family member as heir to the business, how will other members feel and how will their entitlement be provided for? This should all be set out by you and planned for.
What if your business partner died? You might want to have the option to buy them out. You could reach a prior written agreement on the mechanism for a buyout. Would you have the cash to buy out the shares – a trust arrangement can ensure cash can get into your hands at the right time to fund the purchase.
Planning is needed for the payment of inheritance tax (IHT) at 40% on your death. You may have other assets to fund that, but if not your family and the business may have a cash flow issue and planning for that is needed.
Businesses can qualify for relief from IHT. This applies to businesses which are wholly or mainly trading. This valuable relief can be lost or restricted depending upon the assets, their ownership and their use so analysis is required.
If you want to move assets down a generation then that should be done now as it may be the last opportunity to do so tax free. The tax reliefs for businesses passed on in death and during lifetime are currently generous. These tax reliefs have been under pressure and with government debt increasing, they may be under greater pressure.
Divorce (or dissolution)
What if you or another business owner separated from a spouse? In some circumstances, shareholding in a company or ownership of a business can be part of the "pot" for division on divorce. This can have an impact on the operation and ownership of the business. The owner who is going through a separation may require to sell their interest in the business or transfer some or all of their interest to their spouse. This is an important consideration when setting up a business or gifting part of a family business to a child or other relative.
The risk of a business passing out of the hands of the intended owners can be avoided if the owner who is intending to marry enters into a pre-nuptial agreement. This is a contract entered into prior to marriage which enables a couple to regulate financial matters in the event of a breakdown of their relationship. It can provide that the assets held by each prior to marriage (and anything deriving from those assets) will not form part of the matrimonial "pot" for division upon divorce, thereby ringfencing the interest in the business. If for whatever reason a prenuptial agreement is not a preferred option, then the gifting of ownership to a child or other family member can be given via a family trust instead, which would also give ring-fencing protection.
What if you became ill and unable to run your business? A power of attorney can be signed, naming someone to step in and look after things if you cannot do so yourself. This power extends to your shares in a business, but you cannot use the power of attorney to name someone to step into your shoes as director, and so planning for this role should be done within the business.
When making a business plan and managing risks, the risk of death, debt, divorce or disability should be planned for.
Our Personal & Family team at Brodies are able to assist with these matters.