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Business Succession – Key Person Crisis Planning

21 February 2022 |

Our business succession team examine the consequences of losing important people in an organisation and why key person crisis planning is crucial.

The disruption caused by the COVID pandemic has forced many organisations to review their business continuity provisions and think seriously about the impact of losing key people within the organisation.

Although many SMEs are conscious that losing a key person would cause great difficulties in their business, a Legal and General report revealed that more than a quarter said they would face immediate closure if a key employee died or became seriously ill, while another 26% said they would shut down within a year.

If a shareholder dies what happens to their shares?

When a shareholder passes away, the right to their shares transfers to whoever inherits them under their Will or intestacy. The rights of the deceased shareholder will be controlled by his or her executors (if there is a Will) or estate administrators (if the shareholder died intestate).  

The best way to avoid stress and potential disputes after a shareholder’s death is to prepare a Will and include provisions in the company’s articles and shareholder’s agreement. Preparing these in advance will provide family members, shareholders and the company with assurance and formation at a time when it is most needed.  

What happens if someone dies without a Will in place?

When a sole trader dies intestate, and there is no distinction made between the business owner and the company, the assets will be distributed according to the intestacy rules, and the company will technically shut down.

In the event that a partner or shareholder dies without a Will, the intestacy rules will be applied again, and the deceased’s share of the company or shareholding will be distributed to the remaining family members. The remaining shareholders may find themselves with an unexpected business partner or shareholder.

What is a ‘letter of wishes’?

A letter of wishes is a chance to inform and guide executors on how assets should be handled after someone has died. Unlike a Will, a letter of wishes is not a legal agreement, and the executors are not legally required to adhere to any requests made in the letter. While a letter of wishes isn’t a replacement for a Will, it can help executors, family members, and trustees to make decisions and move forward.

Business property relief on death

Business Property Relief (BPR) is a valuable form of tax relief. It allows someone to claim Inheritance Tax (IHT) relief on business assets they own, including shares in qualifying businesses.

You must have owned the business or business assets for at least 2 years before your death to qualify for BPR. Therefore, if you pass away soon after receiving the asset, your estate will not be eligible for the relief. However, there is an exception if you inherit the asset from your spouse who owned it for less than two years. In this case, your ownership period is combined with that of your late spouse. If the combined ownership period exceeds two years, then you will be eligible for BPR relief.

When to contact a specialist legal advisor

The solution to a stress-free process of passing control is to plan for the succession of a business early. Making changes to the business structure, putting shareholder agreements in place, and making arrangements for personal Wills and estate planning are all part of key person crisis planning.

Specialist succession planning advice

We provide business life planning advice to business owners, directors and shareholders. Our Business Life Plan is designed to provide protection for both your business interests and private assets.

If you would like to book an appointment to discuss your situation, we offer a fixed fee consultation for £950 +VAT, where you will meet with both our business and private client solicitors.

Please contact the team by calling 0117 906 9400 or email to find out more or to book a consultation.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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