Owners of businesses face particular challenges when planning what happens to their business after their death.

On the positive side shares in private companies may qualify for Business Property Relief provided that specific conditions are met. These include a requirement that the Company is a trading company and the shares have been held for a minimum of two years. If this is the case shares may be gifted to family members or third parties completely free of Inheritance Tax.

Problems can, however, arise in obtaining tax relief where part of the Company has a trading function and part derives income from investment property. There has been a particular tendency in recent times for some clients to move into property that is often buy-to-let in a variety of forms. Rightly or wrongly they have seen bricks and mortar, and the income from it, as more secure than the vagaries of the Stock Market. (None of these investments are without problems in the current turbulent times!)

If shares qualify for full Inheritance Tax relief careful consideration should be given to passing them to beneficiaries who would otherwise be liable to pay tax e.g. children, as opposed to spouses or civil partners who are exempt from tax. As a compromise it is often useful to use discretionary trusts for such gifts with spouses and children as potential beneficiaries.

As an alternative, shareholders of private companies may decide amongst themselves that their families receive cash rather than shares. This is often the case where small companies do not have a particular dividend policy.

To achieve this result shareholders frequently enter into cross-option agreements. These provide that the surviving shareholders will purchase the deceased's shares for a pre-determined sum. Life policies are taken out on each shareholder's life written in trust for the other shareholders to ensure that purchase funds are available on the death of the shareholder. Shares then pass to the surviving shareholders and cash to the relatives. No Inheritance Tax is payable on the policy proceeds used to buy the shares provided they qualify for Business Property Relief.

It is essential that shareholders consider the needs of their families and the effect an early death would have not only on them, but also their business partners. Term assurance and critical illness cover are also an important part of the planning process. Finally, a well thought out Will is vital and arrangements should be reviewed regularly.

If you would like advice on any of the above, or similar issues, please contact Warren Hawkings or a member of the Wills, Probate, Tax and Trusts team at Wortley Byers on 01277 268345 or whawkings@wortleybyers.co.uk.

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