Putting measures in place during your lifetime can avoid problems later
by Nicola Ker of MCM Solicitors
High pressure, long hours and mounting taxes are now a familiar reality for pubs, restaurants, hotels and hospitality businesses across Scotland.
For many owners, the immediate focus is understandably on keeping the doors open, managing staff and navigating an increasingly challenging trading environment.
It’s therefore no surprise that planning for the future is often overlooked. Like so many things in life, it is easy to become consumed by the day to day demands of running a business, while losing sight of the bigger picture. Yet for business owners in the licensed trade – many of whom have spent years building something of real value – taking time to plan ahead can make a critical difference to both family and business outcomes.
Perhaps it’s time to consider what really matters to you and your family, and what you wish your affairs to look like when you are no longer able to manage them yourself.
Wills and Business Interests
Dying without a Will in Scotland can significantly complicate executry administration process for those left behind. In such circumstances, the laws of Intestacy are applicable, and certain family members will inherit, irrespective of what the deceased may have intended.
This can be particularly problematic where business interests are involved. If no planning has been undertaken in lifetime, the business interests would pass to any surviving spouse / civil partner and / or various blood relatives, depending upon who survives the deceased.
It can also mean that assets are passed directly to your children at 16 – a prospect many business owners find deeply concerning.
Further complications arise where not all family members are actively involved in the business. In practice, it is common for one child to be heavily involved in a family-run pub, restaurant or hotel, while others pursue entirely separate careers, live abroad, or have little interest or experience in the business. There may also be family members with additional support needs, for whom it would not be appropriate to inherit shares in, or derive an income from, a trading business.
Clients frequently seek to ensure that their children are treated equally upon their death despite, at times, varied levels of involvement in the family business. Obtaining professional advice is key to striking that balance of making sure that loved ones benefit in a way that is appropriate to their circumstances.
An expertly drafted Will can provide much needed clarity and peace of mind, ensuring that business interests pass in a way that protects both the enterprise and the people who depend on it.
For example, where a hospitality business is structured as a limited company, it could be possible to plan in lifetime for existing shareholders to have a right to purchase shares from their estate, with the cash proceeds of such a sale passing to the beneficiaries in their Will. This example may be relevant to circumstances where there are non-family members involved in the business.
Business Property Relief and Inheritance Tax
A common misconception among those in the hospitality sector is that all business assets will pass to their intended recipient(s), following death, free of Inheritance Tax (“IHT”). Whilst previously, all business interests which qualified for Business Relief (BR) would pass free of IHT, the applicable rules have very recently changed.
Under the current regime, an estate can benefit from BR, but only to the extent of £2.5m of qualifying assets. Qualifying assets exceeding that value will be taxed at an effective rate of 20%. Transfers of business interests between spouses are exempt, and surviving spouses can benefit from the unused allowance of their predeceasing spouse up to £2.5m.
Strict rules govern whether business interests qualify for relief, and seeking professional advice is key to ensuring that you are operating in a tax efficient way. For example, where large sums of cash are held within a business without sufficient evidence to support them being required in future, families will not benefit from full relief against the value of the business, up to the thresholds noted above.
Gifting business shares in lifetime can be an effective means of reducing the value of your estate for IHT purposes. Under the current rules, business owners could make gifts of qualifying assets up to a value of £2.5m and, if they survive 7 years from that gift, their full relievable allowance of £2.5m would be intact. Further gifts of up to that value could be made in the hope of surviving a further 7 years, and so on. Gifting for IHT purposes requires careful consideration, and professional advice should be sought.
Similarly, gifting business shares to a trust may be a more appropriate option in some instances, where family members are too young to receive significant gifts, or where the business owner is reluctant, for whatever reason, to relinquish control over the business. It is also a useful vehicle where the main objective is to protect the business for your family and avoid any potential claims from creditors or on divorce of any of the beneficiaries. It goes without saying that trust arrangements can be complex, and bespoke advice in relation to their suitability is essential.
Powers of Attorney and Business Continuity
Loss of capacity is commonly associated with those of advanced years and illnesses such as Alzheimer’s or Dementia but can occur at any stage due to accident or serious illness.
For hospitality businesses, the implications can be serious. What would happen if a director of a company / partner of a partnership loses capacity and becomes unable to make decisions on behalf of the business?
Put simply, if they have put a Power of Attorney in place before losing capacity, this should enable their financial attorney to act on their behalf, in their capacity as director / partner (provided the document allows for this), and the business can continue to operate.
Without such arrangements, business activity could be forced to a standstill, pending a lengthy and potentially costly guardianship application through the court. The risk is particularly acute for sole directors and owner managed businesses.
Powers of Attorney covering both business and personal affairs are therefore invaluable documents and can spare families and colleagues significant stress at an already difficult time.
Final remarks
For business owners in the hospitality sector, planning ahead is not simply about tax efficiency – it is about protecting what you have built and ensuring continuity for your family, employees and the business itself. Taking advice early, reviewing arrangements regularly, and putting the right documents in place can help ensure that your affairs are dealt with according to your wishes, whether on death or in the event of loss of capacity. When planning is done properly and in good time, it offers certainty and reassurance when it matters most.
Nicola Ker is a Director and Head of Private Client at McKee Campbell Morrison Solicitors.
