What Happens to a Business When Someone Dies?

A business interest is often one of the most complex assets in an estate. What happens to a business when someone dies depends almost entirely on the structure of that business -- whether it was run as a sole trader, a partnership, or a limited company. Each works differently, and the executor's role in each case is distinct.

Sole traders

A sole trader and their business are legally the same thing. The business has no separate legal identity. When a sole trader dies, the business effectively ends -- there is no entity left to carry it on. The assets of the business (stock, equipment, vehicles, money owed to the business) become part of the estate, and so do the liabilities (unpaid suppliers, outstanding tax, loans).

As executor, you need to wind down the business in an orderly way. This means notifying suppliers and customers, collecting money owed to the business, paying outstanding business debts, and preparing a final set of accounts. HMRC must also be notified -- the deceased will need a final income tax return covering the period up to the date of death, and any outstanding VAT or PAYE obligations must be resolved.

Debts of the business are debts of the estate. If the business has significant liabilities, they must be paid from estate assets before any distribution to beneficiaries. If liabilities exceed assets, the estate may be insolvent -- seek specialist advice in that situation.

Partnerships

What happens to a partnership depends on the partnership agreement. If there is a formal agreement, it should set out what happens when a partner dies -- common provisions include the right for surviving partners to buy out the deceased's share, a right to dissolve the partnership, or a mechanism for the business to continue without the deceased partner.

If there is no partnership agreement, the Partnership Act 1890 applies by default. Under those rules, the death of a partner technically dissolves the partnership. In practice, surviving partners often want to continue the business. They can do this, but the deceased's share of the partnership assets must be valued and paid to the estate.

The executor's role is to identify the value of the deceased's partnership interest and ensure it is properly dealt with -- either by receiving a buyout payment from the surviving partners or by participating in an orderly dissolution. Partnership accounts and the partnership agreement are the key starting documents.

Limited companies

A limited company is a separate legal entity from its shareholders. When a shareholder dies, the company continues to exist and to trade. The other directors carry on running the business as normal. The deceased's shares, however, form part of their estate and pass through the normal estate administration process.

Shares in a private limited company are transferred using a stock transfer form, signed by the executor and submitted to the company's registrar (usually the company itself for a small company). The company then updates its share register. If the shares are to be sold rather than transferred to a beneficiary, a buyer must be found -- often a fellow director or an external buyer -- and the company's articles of association may give existing shareholders pre-emption rights (a right of first refusal).

If the deceased was also a director, the company does not need to be notified of the death through Companies House, but the director appointment will need to be terminated and Companies House updated accordingly. Any guarantees the deceased gave for company borrowing need to be reviewed -- banks and lenders should be notified promptly.

Business property relief and inheritance tax

Business property relief (BPR) is one of the most valuable reliefs in the inheritance tax system. Qualifying business assets can attract relief of 50% or 100%, significantly reducing or eliminating the IHT bill on those assets.

100% relief typically applies to shares in unlisted trading companies and to business assets used in a sole trader or partnership business. 50% relief typically applies to shares in a controlling holding of a quoted company and to some land and buildings used by a business. The business must have been owned for at least two years before death, and it must be a trading business rather than a purely investment business.

BPR does not apply automatically -- it must be claimed on the IHT return (form IHT400), with supporting information about the nature of the business. If there is any doubt about whether BPR applies, get specialist advice. The rules around what counts as a qualifying trading business can be complex, and HMRC does challenge claims it considers doubtful.

Notifying HMRC, Companies House, and other bodies

For a sole trader: notify HMRC of the death and file a final self-assessment return. Close any VAT registration and file a final VAT return. Deal with any PAYE scheme if the deceased had employees.

For a limited company: update Companies House to remove the deceased as a director (using form TM01) if applicable. The company's accountant should be notified and will handle the company's own ongoing compliance separately from the estate -- company obligations do not end just because a shareholder has died.

Business accounts with banks and HMRC often need separate notifications from personal accounts. Do not assume that one notification covers everything.

See also our guides on executor duties, inheritance tax, and shares and investments after death.