Sole Trader Succession

Amanda Simmonds ponders the problems of unincorporated family businesses in England and Wales.

Most advisors are familiar with dealing with family businesses that are incorporated, but will perhaps be less familiar with family businesses run as partnerships or even as sole traders. For the families behind these businesses, there is an expectation that the family will succeed to the business or at least realise the value of the deceased family member’s share.

PARTNERSHIPS

Dealing with partnerships first, the primary point to note is that, if the partnership is governed by English and Welsh law, and there is no partnership agreement, the partnership will automatically be dissolved on the death of a partner.

If there is a partnership agreement, this should be reviewed when the client’s Will is prepared, to check that any provisions do not constitute a binding contract of sale of the deceased partner’s interest so as to affect the availability of inheritance tax business news relief on their death. A well-drafted partnership agreement will also provide how the deceased’s partnership interest will be valued and when that interest will be paid out. You should note that, in professional partnerships, it is often provided in the partnership agreement that no accounts will be made available to the executors, nor can the executors enquire how the value has been reached. This is not necessarily a good thing for the families of the deceased partner, although the professional partnership concerned benefits from such clauses.

It is sensible, when reviewing the provisions applicable on death in the partnership deed, to provide that the deceased partner’s entitlement will be paid in instalments, to give the remaining partners the opportunity to raise the cash required to pay the deceased partner’s family. In this regard, cross option arrangements can be considered, along with putting key-man insurance in place to provide for a manager to help run the business in the event of a partner dying or becoming ill. This will help to manage any transitional period in the partnership’s management.

SOLE TRADERS

Sole traders present different issues, in that any business accounts will be in the sole trader’s person name, so, as soon as their death is registered with the bank, the business accounts will be frozen. The executors will not be able to operate the bank accounts until a grant of probate is obtained. In the meantime, employees and suppliers will need to be paid and, if it is the case of a farming business, animals will need to be fed.

In England and Wales, an inheritance tax account will have to be submitted to HMRC before the grant of probate can be applied for. As there will be a business to be valued, it will take some time to prepare the account.

It is possible to apply for an emergency grant of probate known as a grant ad colligenda bona, to enable the business to be managed before the main grant is obtained. This will make sure the value of the sole trader’s business is preserved for their family. A grant ad colligenda bona will be issued without the inheritance tax account being prepared, providing a clearance letter is obtained from HMRC. Although this type of application is rare, the procedure is quite simple. In addition to applying for the tax clearance letter, a draft affidavit has to be sent to the Probate Registrar setting out the facts as to why the matter is urgent. HMRC has proved to be most sympathetic in these and has in the past issued the clearance letters within 48 hours.

Under a grant ad colligenda bona, the Probate Registrar need not choose the executors named in the Will and can appoint a different executor.  Normally a professional executor is chosen to act under the emergency grant.  Once the grant ad colligenda bona is received, the business accounts can be transferred into accounts   in the professional executor’s name, which will help manage the sole trader business.

A further point to note is that, when the main grant of probate is issued, the grant ad colligenda bona will be automatically revoked.  Therefore, you need to be careful at the time that the main grant is being issued as to which executor is acting, so that the executor does not act when their authority is revoked.