Administering an estate with business assets

Administering an estate that includes business assets presents unique complexities. Whether dealing with a sole trader’s assets, shares in a partnership, or a company controlled by the deceased, careful handling is crucial to maintain business operations, complying with legal obligations, and maximising the value for beneficiaries.

Understanding the nature of business assets

Before tackling the estate administration, it is vital to understand how the business is structured. Common forms include:

• Sole trader business: Operated personally by the deceased, where assets and liabilities are their direct responsibility
• Partnership interest: A share in a business run jointly with others, governed by partnership agreement and subject to dissolution or continuity arrangements
• Limited company ownership: Shares owned in a company, possibly as a minority or majority shareholder, affecting control and succession planning.

Each structure carries different implications for estate administration, and Inheritance Tax.

Immediate considerations following death

Administering business assets requires swift and strategic action to safeguard business continuity and prevent financial deterioration:

• Secure the business: Identify staff who can maintain stability in business operations
• Review business agreements: Check partnership agreements, shareholder agreements, or articles of association for clauses for ascertaining next steps
• Assess liabilities: Identify liabilities, contracts, and financial obligations to prevent disruption to business operations
• Engage professional assistance: Solicitors, accountants, and valuers can help navigate business continuity, and estate administration.

The role of executors and business continuity

Executors must balance estate administration with ensuring business operations continue effectively. Executors may need to:

• Appoint interim management or directors
• Determine whether to sell, liquidate, or transfer business interests
• Ensure compliance with employment and contractual obligations
• Consult with employees, creditors, and investors.

If the Executors carry on the business at least in the short term, they should consider:

• They will be liable for all trade debts incurred after the death and will only have a right of indemnity from the estate if the Will authorises them to continue the business or postpone the sale
• Unless creditors at the date of death have specifically authorised the continuance of the business, their debts take priority over the Executors’ indemnity against the assets of the business
• Compliance with ongoing tax and financial reporting
• They cannot raise funds for the business secured on other assets of the estate
• The business’ stationery must include suitable wording to show that the business is now being run by the Executors
• It is likely that the business’ bank accounts will have been frozen, so the Executors will need to make their own banking arrangements for the business
• Employees’ contracts are transferred to the Executors
• The Executors must complete the deceased’s contracts, subcontracting the work if necessary, unless the contracts are of such a personal nature that the contract is frustrated.

Valuation of business assets

The valuation of a deceased’s estate will bring into account any assets they used in their business. Thus means a business carried on in the exercise of a profession or vocation but does not include a business carried on otherwise than for gain. All business’ assets and liabilities shall need to be valued at an open market value to determine its net worth as at the date of death even those not included in the business’ balance sheet, such as goodwill. The latest set of accounts will provide a starting point but only as a guide, as the real market value may differ considerably from the adjusted figures used to determine the taxable profit.

Valuing a partnership interest is particularly complex. It will depend on the terms of any partnership agreement as to how a partner’s interest is disposed of on death. It is important to take into account any assets in the deceased’s sole name used in the partnership.

Inheritance Tax (IHT) and Business Relief (BR)

BR at a rate of 100% is potentially available for unquoted shareholdings and interests in a business (owned as a sole trader or in partnership). 50% relief is available for shares in a quoted company where the deceased had control of the company and assets used by their partnership or company. Generally, the deceased must have owned the shares of the business for at least two years before their death for the relief to apply. Investment businesses, cash holdings, and certain property assets may not qualify.

At the Autumn Budget on 30th October 2024, the Government announced a restriction to the value of BR that can be claimed from 6th April 2026. Each individual will have a £1m combined allowance for assets that currently qualify for BR and agricultural property relief at 100%, with the exception of shares listed on the alternative investment market (AIM). Any value in excess of £1m attributable to these assets will only benefit from 50% relief.

Selling or transferring business interests

Executors must decide how best to distribute business assets among beneficiaries. Options include:

• Transfer to beneficiaries: If successors are willing and able to continue operations
• Sale to co-owners or external buyers: Usually arranged through pre-existing buy-sell agreements
• Winding up: If the business cannot feasibly continue.

Final thoughts

Administering an estate with business assets requires strategic planning, legal awareness, and financial insight. Executors and beneficiaries must work together to ensure business continuity, maximise tax benefits, and give effect to the deceased’s wishes. Professional guidance is essential in preventing disputes between beneficiaries, and streamlining the estate administration.

If you have any questions about the topics raised in this article, please get in touch.