In many ways, family businesses sit at the heart of commerce in our country. From small scale business-to-consumer outfits to larger business-to-business models, family businesses deliver vital products and services that make the UK one of the richest and most diverse markets in the world.

By their very nature, family businesses are often personable, customer focussed, and values-driven. A business that's kept within a family over generations becomes known in their local communities, oftentimes bringing significant commerce to an area, providing much-needed jobs and vocations for the local community.

As many benefits as there are to a family business, complications can arise when shareholders pass away. In this short blog, we're going to look at the importance of having a will in place for when you or another shareholding family member passes on.

The importance of a family will

When you run a family business spanning multiple generations, it's inevitable that you'll need to one day deal with the death of a shareholding family member. When that unfortunately happens, you can be left in a situation where that family member does not leave instructions for their estate.

Each generation operating in the family business will also have their own family – husband/ wife/ partner/children – that they want to look after too, so consideration needs to be given to both personal assets and the family business.

Alongside the grief and stress that accompanies the death of a family member, complications over their shares are an unwelcome additional stressor.

For that reason, it's important for you, your family and for your beneficiaries that you have a clear will in place dealing with personal assets and making sure that any interest in the family business is clearly addressed in either or both the will or the company's constitutional documentation.

The intestacy rule

Where someone dies without a will, their estate will pass via intestacy rules. What this means will differ depending on the circumstances of the person in question.

Much of the time, this will mean the shares will pass to that person's spouse or their children. However, the intestacy rules have a split whereby the first £270,000 is for your spouse and the remainder is split equally between your spouse and your children. Given the value of shares in a family business may be substantial, a likely occurrence could be that any such shares are split between your spouse and children.

The rules also do not cater for (unmarried) partners no matter how long they have been together. This could result in a claim being made against your estate by the partner if this is the case.

As you can see, multiple complications could arise from the intestacy rules.

One additional complication could be that the inheriting family members may not be involved in the business and may not be interested in being involved. This could significantly complicate probate as it throws up all kinds of issues regarding where the business goes from there.

  • Do the inheriting parties want to sell the shares to the surviving shareholders?
  • Can the surviving shareholders afford to buy out the inheriting party?
  • Can the surviving shareholders run the company without a replacement for the deceased party?

Sometimes the inheriting family members may want to get involved with the family business where previously they have had no involvement. This can cause serious issues with the wider family members already involved with the family business.

These are all issues that would be vastly simplified were a will in place.

Ensuring company documentation and personal wills are consistent

An incredibly important thing to ensure when running a family business is that a shareholder's personal will reflects the wishes outlined in the company documentation (shareholder's agreement, articles of association etc).

Where there is a discrepancy between the two, i.e. the company documentation says one thing but a deceased shareholder's personal will says another, a legal stalemate can ensure with little getting resolved due to the fallout.

Inheritance Tax

Inheritance tax can be complicated. It may be that the family business qualifies for business property relief as the business is a trading business rather than an investment. This would mean that tax would be paid at 0% on the value of the shareholding but the value of the shares could impact on the tax due in the personal estate, particularly if the deceased is not married and not leaving the assets to their spouse. This could have an impact on the family business if cash is needed to fund any inheritance tax so that the estate can be progressed and distributed.

It is vitally important that each family business is aware of what the impact death of a family member would have on the business and where appropriate perhaps even consider insurance.

An example

Company X was a family business with the eldest shareholder holding 80% of the shares. His son and grandson each held 10% each. Upon the elder shareholder's death, his will unexpectedly stated that his shares should be bequeathed to a distant family member. This was contrary to the plan outlined in the company documentation and came as a complete shock to the surviving shareholders.

This family member outlined in the will was uninterested in the business, its employees and its beneficiaries. They also held an extremely negative opinion of the surviving shareholders and was only interested in extracting as much money from their shares as possible.

This nightmare scenario resulted in a 2-year legal stalemate before a solution was found.

The bottom line – Communication is key

A properly drafted will can provide the business certainty required when a shareholding family member passes on. With all businesses, communication is key. In a family business, that is doubly true.

By communicating your intentions and wishes both to the other shareholders and your non-shareholding family members, ugly stalemates and nasty surprises won't add to an already difficult family situation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.