If you have been lucky enough to create and develop a successful business, it is only natural that you would wish to preserve the financial benefits and rewards of your endeavours within your family. The gifting of business assets and monies to family members, particularly children, can be very satisfying and rewarding. However, the gift may become an issue if the family member’s relationship with a partner breaks down, and the departing partner seeks to make a claim against the gifted wealth.
The protection of wealth should always be an important consideration when a gift of any significance is given. It is sensible to take steps to avoid a potential claim arising.
There are a number of ways in to preserve business wealth within the family:
Appointing family members at senior positions in the business
Remuneration packages at a senior level, for Directors or Managers, can be significant. The package can include, in addition to wages, other benefits such as the provision of a car for business and personal use; health insurance; gym membership; or travel opportunities. Even accommodation can form part of the package. These benefits are retained on a contractual basis by continued employment, and they are not transferable to the departing spouse/civil partner. The income received, will of course, be assessed for the purposes of maintenance. However, the accumulated wealth in the family business remains untouched. When considering what employment benefits can be utilised, it is important to take tax advice for both the company and the recipient.
Assets across all or part of the business can be placed into a Trust, and the income and capital value generated by those business assets can be distributed in accordance with the terms of the Trust. Discretionary trusts are particularly useful in situations of potential family disputes. The family member receiving the benefits from the Discretionary Trust fund does so at the discretion of the Trustees and has no actual enforceable entitlement. You can also set up a Trust arrangement when providing a home for a family member or a new partner. The terms of the Trust can protect the business wealth that funded whatever percentage of the purchase price. Trusts have their own tax regime; so once again, you should seek advice on Tax planning in this area before setting up any Trust.
This is an agreement made between parties intending to enter into a marriage or civil partnership, detailing what will happen in the event that the relationship breaks down. In the jurisdiction of England and Wales, the courts have a wide discretion in determining the division of assets, when spouses/civil partners cannot reach an agreement. Pre-nuptial agreements (or pre-nups) have been around for many years. However, over the last decade judicial thinking has moved to the position that a pre-nup should be enforceable subject to the outcome of any financial settlement being fair and sufficient to provide for the needs of the children of the family. A pre-nup made in accordance with required legal formalities can provide significant security for any family business wealth already transferred or subsequently transferred to a family member.
This is an agreement made after the family member’s relationship is formalised by a religious or civil ceremony. The agreement can be entered into to reaffirm the terms of an already existing pre-nuptial agreement. The agreement can also be made without an existing pre-nuptial agreement. The courts in England and Wales are unlikely to rule against a post-nuptial agreement created in accordance with the correct legal formalities.
If the family member’s relationship is not to be formalised, a cohabitation agreement will act as a record of any agreements made over the division of assets in the event that the relationship breaks down. The cohabitation agreement forms a contract between the parties, and is enforced by the usual contract principles.
Considerations for surviving family members
On death of a business owner, the assets owned within the business form part of the estate for the purposes of inheritance tax. This is an important consideration in later life, the family usually being preferred beneficiaries to HM Revenue & Customs. There are various arrangements available to avoid or reduce inheritance tax liability, including lifetime gifts and charitable dispositions in a will. Trusts can also be a useful device, either within or outside a will. The ongoing ethos, purpose and management of the business can also be protected by a Trust arrangement, continuing the vision created by the deceased business owner.
Any arrangement entered into has potential tax consequences for both the parties to the agreement and the business as a whole. You should seek early expert tax advice before any final decisions are made.
It is important that any arrangements made are evidenced by a course of conduct and adhered to, not merely a façade set up purely to prevent a claim being made by a departing spouse/civil partner. If an arrangement is found to be a façade, the court can treat the business wealth/income received by the family member as if the family member had ownership/entitlement, and reduce the family member’s claim against the other assets in the marriage.
If you need any information or advice on any of the issues raised in this article, we have experts to assist you in any of your business decisions. Ince is here to help you with all of life’s challenges.
Sharon Priday is a Managing Associate and member of the Family & Matrimonial at Ince. Sharon has practised in Family Law for 30 years and has extensive experience in dealing with matrimonial disputes at all levels.
She can be contacted by email at [email protected] or by telephone on 07841 477239.
The information above is not and should not be taken as legal advice. You should not take action or omit to take action based on this information. If you require any help on the issues raised above, please get in touch using the details above.