Sole Trader

The issues

When a sole trader dies, the business dies with them. The business’s assets will form part of the sole owner’s estate and pass on to beneficiaries under the terms of their will. If the owner has not made a will, the laws of intestacy apply – in effect, the state lays down who the estate should pass to.

 If the estate is large enough ( £325,000 in 2011/12, including the value of any homes, business and other assets) and is not left to a spouse or civil partner, inheritance tax (IHT) is payable on all assets above £325,000 . The good news is that most businesses are not subject to IHT.

Two issues can arise: * Paying the inheritance tax bill. * Passing on the business – perhaps to an employee or to a family member. The solution In both of the instances above, the requirement is for a lump sum of money to be created, preferably outside the estate (to minimise IHT). This can be achieved through a suitable life insurance policy.

Generally we recommend that the sole trader takes out a life insurance policy on their own life and either assigns it to the beneficiary or sets up a trust to pay the beneficiary on their death. The exact solution depends on a number of factors, but here are two examples:

* James, who has no close family, wants to leave his engineering business to his production manager Ken. Ken would not be able to buy the business’s assets on death, nor could he afford to pay the life insurance premiums. Instead, James takes out a policy on his own life, in trust for Ken. On James’ death, Ken has a lump sum to be able to buy the business assets and continue running the business, now under new ownership. Having this arrangement also gives Ken a strong incentive to remain with the business, and is valuable as a succession planning tool.

* Melanie plans to leave her shop to her daughter Sam, but calculates that on her death IHT of around £200,000 would be payable on the rest of her estate. She is concerned that Sam would have to sell or mortgage the shop in order to pay the IHT bill, so she takes out a life insurance policy on her own life and assigns it to Sam. Sam then pays the premiums and, on her mother’s death, has a sum of money she can use to pay the IHT bill.