View more on these topics

Grave implications

It is an obvious truism that, with the exception of sole proprietors, every business is owned by at least two people although not necessarily in equal proportions. Yet the owners of only relatively few of these businesses have ever given serious thought to what might happen when one or more of the owners dies.

Financial planners have helped many businesses to not only identify the potential problems which might occur but to determine and install strategies which can help overcome some or all of these problems. In the case of limited companies, these strategies are often referred to as director share purchase arrangements – somewhat of a misnomer as the strategy relates to arrangements among shareholders, not the directors. For unincorporated businesses, a partnership share protection strategy is most commonly used.

In this article, I will start to discuss the main issues relating to the establishment of a strategy to provide sufficient finance for shareholders and partners to buy out the share of a business owned by a deceased colleague. I will be stressing that only with a knowledge and understanding of the whole process can an IFA profess to be a proficient practitioner in this class of business. I will identify the key issues within five particular stages in the process:

•Agree the current and desired planned recipients of the shares of each of the shareholders in the event of their death.

•Agree a valuation or valuation basis for the shares, noting not only the wishes of the shareholders but also the potential tax liability if the valuation differs significantly from Inland Revenue guidelines.

•Arrange life insurance to enable any buyout of shares to be funded or otherwise establish that sufficient funds will be available at that time to enable the agreed purchase price of the shares to be met.

•Agree and help to implement the appropriate form of agreement so that there is a clear and written basis as to what has been agreed and also to maximise tax-efficiency.

•Regularly review the arrangement with the shareholders after its installation.

I will also be stressing the importance of the full involvement and cooperation between the IFA, the company accountant, the company solicitors and, indeed, the accountants and solicitors for each of the shareholders. If all this sounds a little cumbersome (“I have never done it like that,” I can hear one or two readers think) then I must bring your attention to the pitfalls of not involving all these parties.

Can I also stress that the issues in this series of articles are even more crucial to small and medium-sized businesses than to very big companies whose shareholding is divided between a large number of shareholders with no dominant holding. Thus, I strongly suggest that these articles should be important to a wide range of IFAs with business clients of any size. First, therefore, a few simple basics to set the scene.

The concept of what is commonly called director share purchase is to prevent the situation arising where a surviving shareholder finds that, following the death of a fellow shareholder, he is owning and running a business with the spouse of the deceased, who often has little or no interest in the running of the business. Frequently, this impasse leads to the business falling into disarray and eventual collapse, obviously to the severe detriment of both the surviving shareholder and the new incumbent as they both lose future income streams and business value.

The objective of director share protection (I will deal with partnerships later in this series) is to ensure that, on the death of one of the shareholders, ownership of the deceased&#39s share in the business transfers to exactly the persons they have earlier selected. Moreover, the arrangement must ensure that financial consideration for the transfer of shares is available to be paid to a pre-determined beneficiary.

So let us move on to the process of recommending and installing a share purchase arrangement, starting with an investigation, under stage one of the process outlined above, of current distribution of the shares, the people to whom these are due to pass on the death of each shareholder and, most important, the people to whom the shareholders would like these shares to pass.

First, we need to ensure that we know the exact split of shareholdings. Here, leave nothing to chance. Note the number of shares in issue. This can be ascertained from the company accounts if your contact is not immediately certain of the number but the company accountant would be a more up-to-date source of information, remembering that the published accounts show an historical position which might have changed over the last few months. Also request details of any share options and consider any impact the exercising of these share options could have on control of the company.

From these core details, it is vital in many instances that the adviser attempts to gain an understanding about which person or people really control the company, with particular regard to the relationship between the shareholders in their general corporate voting intentions. An example should serve to illustrate this point.

The IFA should ensure he is aware of the relationship between these four people so that, for example, if Mary and Jack are married, could he be safe to assume that they are usually in corporate agreement with each other? If Tony and Theresa are also married, it can be perceived (subject to confirmation) that control of the company rests with Mary and Jack. This being the case, the apparently substantial shareholdings of Tony and Theresa have little or no voting power in reality unless they can persuade either Mary or Jack to break ranks with their spouse.

It is crucial for the IFA not only to identify the percentage shareholdings but also to make further investigation as to the allegiances and alliances within those shareholdings.

The next stage is to determine what would happen to these shareholdings on the death of one of the owners and investigate any shift in the balance of power. We will deal with this in my next article but, in the meantime, think about the implications in the example above if it was known that Jack&#39s will indicates that he wishes his shares to pass to Tony on his death.

Keith Popplewell is managing director of Professional Briefing


Call to align all the reviews – Prudential

Prudential is calling for the Government to work with regulators and the industry to align all current reviews into a single package of measures in its response to Sandler.The life office, which says it supports the aims of the review, believes that simplification of financial services is key to closing the UK savings gap and […]

Ferguson plays below his handicap

The Diary is no golfer (more like a gofer) but was still impressed by Abacus director David Ferguson&#39s achievement last week at the Craigielaw Golf Club&#39s summer meeting.Despite having been on a 14-hour bender (not involving many white wine spritzers, MM suspects), David won with rounds of 66 and 70. But even more impressive was […]

Cautious welcome from Misys members

“It&#39s early days but I would hope some of the funds raised from flotation would be pumped back into the business and help ease the large burden of fees on members. Perhaps they could use the extra money to introduce a cap on fees.”DBS member Best Advice senior financial consultant Anthony Moss

Friendly fire, not a shootout

It would be a hard-hearted commentator who could find nothing of value in a 220-page report; it would be a complacent one who failed to find something to criticise. I found the Sandler report a “Leone” – containing the good, the bad and the ugly.Let&#39s start with the good. I reckon IFAs should feel good […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm