Probate For High-Net-Worth Individuals: What Happens To Business Assets?

As a high net worth individual, you may have significant assets tied up in business interests, and understanding what happens to these assets during probate is essential. Probate, the legal process of administering an estate after death, becomes more complex when business assets are involved. The valuation, transfer, or potential sale of business interests can have significant implications for inheritance tax, the future of the business, and the distribution of your estate to beneficiaries.

At Blackstone Solicitors, we offer expert legal guidance to clients across England and Wales, helping to navigate the probate process and ensure the protection of business assets. This article will explore how probate affects business assets, key considerations for business owners, and steps you can take to prepare for the probate process to safeguard your estate.

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For a free initial discussion on how we can help you deal with the legal implications of dealing with Probate, get in touch with us today. We are also experienced in dealing with all aspects of Wills and Probate and we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.

What is Probate?

Probate is the legal procedure through which the estate of a deceased individual is managed, debts are settled, and remaining assets are distributed according to the will. If there is no will, assets are allocated in accordance with intestacy laws. For high net worth individuals, probate often involves complex assets such as business interests, shares in private companies, partnerships, or other business-related holdings, which require specialised handling.

How Business Assets Complicate the Probate Process

Business assets are often the most valuable component of an estate, and their management during probate can be complex due to several factors:

1. Valuation Challenges: Determining the market value of business assets can be difficult, especially if the business is privately owned, has intellectual property, or involves complex revenue streams.
2. Tax Implications: Business assets are considered when calculating inheritance tax (IHT), which can affect the overall tax liability of the estate. There are, however, reliefs such as Business Property Relief (BPR) that may reduce the amount of IHT owed.
3. Ownership Structures: The structure of business ownership—whether a sole trader, partnership, or shares in a limited company—will influence how assets are treated during probate.
4. Continuity of Business Operations: Probate can also have implications for the ongoing management of the business. Key decisions need to be made about whether the business will be sold, transferred, or continue to operate under the management of family members or appointed executives.

Key Considerations for Managing Business Assets During Probate

The probate process involving business assets requires careful planning and strategic decision-making to ensure that your business interests are handled according to your wishes and in the best interest of your beneficiaries. Here are some of the key considerations:

1. Business Valuation

An accurate valuation of business assets is essential for probate. Valuing a business can be more complex than valuing other types of assets due to factors such as market conditions, future earning potential, and the value of any intellectual property or goodwill. The valuation must reflect the business’s fair market value at the date of death, which will be used to determine the estate’s IHT liability.

Several valuation methods may be considered, including:

• Asset-Based Valuation: This approach assesses the value of the business based on its net assets (assets minus liabilities). It is often used for asset-heavy businesses such as real estate companies.
• Earnings-Based Valuation: This method considers the future earnings potential of the business, making it suitable for businesses with strong revenue streams.
• Market-Based Valuation: If comparable businesses in the same industry have been sold recently, their sale prices can be used to estimate the value of the business.

It is advisable to engage a qualified business valuer who has expertise in the specific industry in which the business operates to ensure that the valuation is realistic and compliant with legal requirements.

2. Understanding Business Property Relief (BPR)

Business Property Relief (BPR) is a valuable relief that can significantly reduce the amount of inheritance tax payable on qualifying business assets. BPR can reduce the value of business assets by up to 100% for IHT purposes if the business meets the qualifying conditions. These conditions include:

• The Business Must Be a Trading Business: Investment companies generally do not qualify for BPR. The business must have been a trading entity (carrying on business for profit) for at least two years prior to death.
• Types of Qualifying Assets: Shares in unlisted companies, shares in companies listed on the Alternative Investment Market (AIM), and a business owned as a sole trader may qualify for 100% relief. Land, buildings, or machinery used in the business may qualify for 50% relief if they are owned separately from the business.

It is important to ensure that your business structure is eligible for BPR, as this relief can save beneficiaries a significant amount in inheritance tax.

3. Ownership Structures and Legal Agreements

The ownership structure of your business will impact the probate process and determine how your business interests are distributed or managed after death. Common business structures include:

• Sole Proprietorships: If you own the business outright, it will be treated as part of your estate. The probate process will determine whether the business is to be sold or transferred to a beneficiary.
• Partnerships: A partnership agreement often contains provisions regarding the death of a partner, including whether the surviving partners have the right to purchase the deceased’s share or whether the share will pass to the deceased’s heirs.
• Limited Companies: If you own shares in a private limited company, the company’s articles of association and any shareholders’ agreements will dictate what happens to those shares. There may be restrictions on transferring shares or pre-emption rights for existing shareholders.

It is essential to review these legal agreements regularly to ensure they reflect your wishes and provide clarity on how your business interests will be handled during probate.

4. Succession Planning and Business Continuity

For high net worth individuals, ensuring the continuity of the business is often a priority. You should consider the following strategies to help manage your business assets during probate:

• Draft a Business Succession Plan: A well-thought-out succession plan can provide a clear roadmap for what should happen to the business upon your death. This may include appointing a successor, transferring ownership to family members, or planning for a sale.
• Include Instructions in Your Will: Clearly specify in your will how you would like your business assets to be managed. You can designate beneficiaries to receive shares or instruct the executor to sell the business.
• Appoint a Knowledgeable Executor: Choose an executor who understands the complexities of managing a high-value business estate. In some cases, appointing a professional executor or a co-executor with relevant experience may be beneficial.

5. Addressing Liquidity Issues

Many high net worth estates consist of valuable assets, but may lack sufficient liquid assets to cover probate costs, inheritance tax, or other expenses. When business interests form a large part of the estate, liquidity can be a concern. Solutions to address this include:

• Life Insurance: Arranging life insurance that pays out a sum sufficient to cover inheritance tax liabilities can help maintain liquidity within the estate.
• Setting Up a Buy-Sell Agreement: This is a legally binding agreement that outlines how a partner’s share in the business will be handled if they pass away. The agreement is often funded by life insurance policies to provide the necessary funds for the surviving partners to buy the deceased’s share.
• Utilising Company Reserves: If the business has sufficient reserves, these funds can be used to meet tax obligations and other estate-related expenses.

Practical Steps to Prepare for Probate

To ensure the smooth handling of your business assets during probate, consider taking these proactive measures:

1. Regularly Review Your Business Valuation: Keep an up-to-date valuation of your business, especially if there are significant changes in value.
2. Draft or Update Shareholder and Partnership Agreements: Ensure that agreements reflect your wishes and clearly address what happens to shares or interests upon death.
3. Establish a Trust: Transferring business interests into a trust can help reduce the taxable value of the estate and provide clarity regarding the management of business assets.
4. Update Your Will to Reflect Your Business Interests: Make sure your will includes specific instructions on how you want your business assets to be dealt with, whether you wish for the business to be sold, transferred to a particular beneficiary, or continue to be operated by family members.
5. Seek Professional Advice on IHT Planning: Work with solicitors who specialise in high net worth estates and business succession planning to optimise tax efficiency and protect your business for the next generation.

How Blackstone Solicitors Can Assist

At Blackstone Solicitors, we specialise in advising high net worth individuals on managing probate and planning for the transfer of business assets. We offer expert legal guidance across England and Wales, assisting with business valuations, succession strategies, and navigating the legal complexities of probate.

By taking a proactive approach and working closely with experienced solicitors, you can ensure that your business interests are handled in line with your wishes and that the impact on your beneficiaries is minimised.

Conclusion

Managing probate when business assets are involved requires careful planning and a thorough understanding of the probate process. By considering valuation methods, taking advantage of tax reliefs, addressing ownership structures, and planning for business continuity, you can protect your business and provide for your beneficiaries.

How we can help

We have a proven track-record of helping clients deal with complex probate matters. We are a multidisciplinary firm and have all the expertise inhouse to satisfy the most exacting requirements of our clients. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

How to Contact Our Wills and Probate Solicitors

It is important for you to be well informed about the issues and possible implications of probate. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.

To speak to our Wills and Probate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Blog, News Tagged as

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