Private wealth: a guide for entrepreneurs

If you own a private limited company, you’ll be familiar with the articles of association. This is a statutory, legally-binding document that sets out how the company will be run, enshrines key rights and obligations and is something that is registered with Companies House. 

Shareholders’ agreements regulate relationships between shareholders. These are optional and sometimes considered an unnecessary expense if you’re just starting out. But, they are well worth the investment to protect your interests in the future. 

Shareholders’ agreements typically cover issues such as policies on what the company may or may not do, the issuing, selling and transferring of shares, dividends, the appointment of directors, and which decisions need shareholders’ consent. 

They can be used to address many eventualities including disagreements between shareholders or what will happen if a partner wants to exit the business in the future. 

They are also particularly useful for SMEs, where there are usually fewer shareholders, and those shareholders are often directors. For example, in a company owned equally by three people, two could join forces to oust the other without good reason if there was no shareholder agreement in place.

Importantly, they can interact with a shareholder’s own personal estate planning to ensure that shares can be transferred to family members or trusts, or a mechanism is in place to ensure that those beneficiaries receive the value from the shares, if not the shares themselves.

The articles of association offer some security, but adding a shareholders’ agreement too is belt and braces. It is also worth noting that it is possible to combine both in a single document.

A will should not only integrate with the approach taken in the shareholders’ agreement, but it should maximise the inheritance tax reliefs available to you as a business owner, specifically business relief. 

Any business, or share of, must be treated as part of the estate for inheritance tax purposes, but you can get business relief of 50% or 100% on certain business assets such as property and buildings or unlisted shares, provided that the business is trading.  

You may also be able to take advantage of business relief on inheritance tax during your lifetime if gifting business property or assets that you have owned for at least two years. The recipient will qualify as long as the assets are kept on as a going concern until your death. Should you survive for more than seven years after the date of the gift, you will no longer be liable for Inheritance tax.

A lasting power of attorney allows you to appoint an attorney to act on your behalf should you lose mental capacity. It is typically not something people tend to think about until they are much older. 

There are two types – one for health and welfare, and one for property and financial affairs. You can appoint more than one attorney and it is increasingly common for business owners to appoint a colleague or trusted adviser to handle business decisions including exercising your voting rights as a shareholder. 

You cannot delegate the role of director to an attorney, but a contingency plan for if you lose capacity should normally be included in the articles of association and/or shareholders’ agreement.

Pension planning should be a top priority for entrepreneurs, not only to ensure you have a healthy source of income upon retirement but to take advantage of the available tax relief.

If you’re a director of a limited company, you can contribute pre-taxed profits to your pension pot both as an individual and an employer. However, while personal contributions are only tax-free up to certain limits, there’s no restriction on the amount that can be put in by the company thus allowing you to make larger contributions. 

Employer contributions are also deducted from the company’s taxable profit and will reduce the company’s corporation tax liability. 

A popular wealth planning tool is to take shares out of your personal ownership and put them into a trust, typically for the benefit of a child/children. This is one of the most common forms of estate planning as it allows you to retain control of shareholder voting rights whilst ringfencing the share value. You can act as trustee alongside others.  

The structure of a discretionary trust is popular as it allows for maximising inheritance tax reliefs and is particularly useful as an estate planning tool prior to a business sale.

As the beneficiaries of trusts are not entitled to the trust assets, this can safeguard against situations such as where beneficiaries are not yet responsible enough to manage the money themselves or where relationships deteriorate.

Unlike a will, which becomes a matter of public record, discretionary trusts can also be a way of keeping private the details of how your estate is divided upon your death.

In the event that you are due to receive an inheritance that you do not need then you can alter how your share is distributed via a deed of variation. There are various reasons why someone might use a deed of variation, one of which is to make the estate more tax-efficient by reducing the amount of inheritance tax and/or capital gains tax payable. 

An example of this would be if a person were to employ a deed of variation to pass their inheritance directly onto their children.

Any changes must be made within two years of the deceased’s death and only if all the beneficiaries agree. The executor will also need to provide a copy of the deed to HM Revenue and Customs.