Using a family business trust for business succession planning

Passing on a family business to the next generation can be challenging. Using a trust can safeguard the business as well as offering tax advantages.

While it is always important to have a Will, if you own a business, your planning for the future should really go further.

Simply leaving your business to your beneficiaries could result in difficulties, for example, in the event that one of them later divorced and their share in the business was included in the division of marital assets.

By creating a trust, you have a wide range of options available to you. You can pass on the business and the responsibilities that go with it in a safe way and retain some control during your lifetime if you wish.

Using a business trust

By putting the shares of a business in a trust, they are safeguarded from misuse or loss. There is also the chance to put shares in trust for beneficiaries who are not involved with the business so that they can have an income but without any voting rights or say in the running of the organization.

The voting rights of shares that are placed in trust are held by the trustees.

Shares and the income from them can also be used in this way to provide for grandchildren who are not old enough to be involved with the running of the business.

Tax efficiency

Business interests usually qualify for business property relief, meaning they do not attract Inheritance Tax, or pay it at a lower rate. Shares will not qualify for this relief until they have been owned for two years, so this should be taken into account in the event that a shareholder is elderly or unwell. If the shares are transferred and the person dies shortly after, the proceeds of any sale or gift would be taxable at 40 per cent.

Assets left to a spouse do not attract Inheritance Tax, so it could be considered an error to leave an exempt asset to a beneficiary who is also exempt.

By putting shares into a trust, the benefit of the business can be left to the spouse and children, ensuring that your spouse is not left out, but that your children are also included.

Discretionary trusts

Discretionary trusts give the trustees the flexibility to decide who will receive the benefit of shares after a death, taking into account the beneficiaries’ needs as well as the tax situation.

The person creating the trust, known as the settlor, can write a letter of wishes requesting that their spouse be prioritised for income during their lifetime.

After the death of the spouse, the shares could remain in the trust, with the income going to other beneficiaries or the shares and other assets could be passed directly to the beneficiaries.

A discretionary trust also gives trustees flexibility to make decisions based on the situation at any given time, allowing them to cope with unforeseen circumstances.

Succession planning can be complex, but it is an essential part of owning a business.

If you would like to speak to one of our expert trusts lawyers, ring us on 0345 2413100 or email us at

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