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Limited Company vs. Sole Trader: Will Implications You Must Know

· 25 min

Note: The following scenario is fictional and used for illustration.

Marcus, 34, a freelance digital marketing consultant in Manchester, spent three months researching whether to register as a limited company or stay a sole trader. He compared tax rates, admin costs, and professional image. When he died unexpectedly in a cycling accident, his partner Emma discovered he'd never made a will. His £180,000 business assets—including £60,000 in client receivables and equipment—were frozen in probate for 11 months. Emma couldn't access funds to pay the VAT bill or outstanding supplier invoices. The business collapsed, and HMRC pursued the estate for unpaid taxes.

Marcus had researched every aspect of his business structure—except the one that mattered most to Emma.

4.2 million people are self-employed in the UK, yet approximately 60% of UK adults have no valid will, leaving their families to navigate complex probate processes while business assets remain frozen.

This article reveals exactly how your choice between limited company and sole trader affects your will, inheritance tax, and what happens to your business when you die—so you can make an informed decision that protects both your business AND your family.

Table of Contents

Why Your Business Structure Matters for Your Will

Most business structure advice focuses on tax efficiency, accounting costs, and professional image. But there's a critical factor that accountants and business advisors rarely mention: what happens to your business—and your family—when you die.

Your structure choice determines who inherits your business, how quickly they can access assets, your inheritance tax liability, whether operations continue, and protection from creditors. These aren't abstract concerns. They're the difference between your family inheriting a functioning business worth £200,000 or watching it collapse while assets sit frozen in probate.

Consider Sarah and James. Both had £220,000 estates when they died in the same month. Sarah ran her catering business as a sole trader. James operated his IT consultancy as a limited company.

Sarah's business bank account was frozen immediately. Her executor couldn't access £45,000 in receivables or pay the £8,000 outstanding supplier invoices. Clients moved to other caterers during the probate delay. The business value evaporated. Her family eventually received only £35,000 after settling business debts—a loss of £185,000.

James's limited company continued operating. His shares transferred to his wife through his will. The company bank accounts remained active. His wife appointed a new director, maintained client relationships, and continued drawing dividends. The business retained its full £220,000 value.

The difference? Business structure and a valid will.

Average probate for estates with business assets takes 11 months, during which sole trader accounts remain frozen but limited company operations continue. Yet most entrepreneurs make structure decisions without considering estate planning implications.

The fatal assumption is: "I'll sort out my will once the business is established." By then, you may have accumulated significant assets, hired employees, signed leases—all while your family remains vulnerable to a business structure that offers no protection if you die unexpectedly.

What Happens to a Limited Company When You Die

A limited company is a separate legal entity. When you die, the company doesn't die with you—it continues operating as before.

What transfers through your will are your shares in the company. These shares are your personal assets, just like your house or savings account. They represent your ownership stake and can be left to specific beneficiaries.

Because the company exists separately from you, business bank accounts remain operational. Day-to-day operations can continue if other directors or managers are in place. Clients, suppliers, and employees experience minimal disruption.

David owned 60% of a £2 million consultancy structured as a limited company. His will left his shares to his wife. The company's articles of association contained no transfer restrictions. When David died, his wife became the majority shareholder, the business continued operating without interruption, and she drew dividends while appointing a trusted colleague as managing director. Total disruption: minimal.

But there's a critical complication most business owners overlook: your company's articles of association may override your will.

Articles of association are your company's governing document filed with Companies House. They can contain pre-emption rights (other shareholders have the right to buy shares first), transfer restrictions (limiting who can own shares), or forced sale clauses that trigger automatic share purchases when a shareholder dies.

A "deemed notice" clause, for example, treats death as automatic notice to sell shares to remaining shareholders at a predetermined formula—often well below market value. Your will states your shares go to your spouse, but the articles force a sale to your business partner for £150,000 when the true value is £400,000. The articles win.

Here are three real-world scenarios:

Scenario 1 (Smooth Transition): Single director and 100% shareholder leaves all shares to spouse in will. Articles are silent on transfers. Spouse becomes director and continues business exactly as before.

Scenario 2 (Deadlock): 50/50 shareholders, one partner dies, will leaves shares to adult children who don't want involvement, articles require unanimous decisions for major actions. Deadlock ensues. Business paralyzed.

Scenario 3 (Forced Sale): Articles contain "deemed notice" clause triggering automatic share purchase by remaining shareholders at book value formula. Family receives £180,000 cash instead of £600,000 market value shares. Articles override will.

Critical Planning Steps:

  • Review your articles of association before writing your will (download from Companies House or company records)
  • Check for pre-emption rights, transfer restrictions, or forced sale clauses
  • Ensure your will aligns with company governance documents
  • Appoint directors who can act in your absence
  • Communicate your succession plan with business partners
  • Consider shareholder agreements that clarify what happens on death

Limited company structure offers continuity—but only if your will and company documents work together, not against each other.

What Happens to a Sole Trader Business When You Die

The harsh reality: when a sole trader dies, the business dies with them.

Under HMRC guidance CA15300, a sole trader business ceases to exist on death because the business and individual are the same legal entity. There's no separation.

Business bank accounts are frozen immediately when the bank is notified of your death. No one—not your spouse, not your business partner, not your executor—can access these funds until probate is granted. This freeze applies to 100% of sole trader deaths and typically lasts 6-18 months.

All business assets—equipment, stock, receivables, intellectual property, goodwill—become part of your personal estate. They're trapped in probate alongside your house and savings.

All business debts become personal debts of your estate. Creditors can pursue estate assets including the family home because sole traders have unlimited liability.

Emma, 42, ran a successful graphic design business as a sole trader. She had £35,000 in business equipment, £90,000 in outstanding client invoices, and died suddenly of a heart attack. Her brother was appointed executor.

He couldn't access the business bank account for 9 months. Clients paid their invoices into the frozen account—£90,000 sitting untouchable. Meanwhile, the landlord demanded £8,000 in unpaid rent and threatened legal action. Equipment leasing companies repossessed £12,000 worth of printers and computers.

By the time probate was granted, most clients had moved to other designers. The goodwill Emma had built over 15 years evaporated. The business that was worth £125,000 as a going concern yielded only £12,000 after debts were settled and equipment sold at auction.

Your executor faces three stark choices:

Option 1: Wind down the business. Sell assets, collect debts owed to the business, pay creditors, distribute remainder to beneficiaries. This is the most common outcome but typically recovers significantly less than going concern value.

Option 2: Continue trading temporarily. The executor becomes personally liable for any losses incurred during this period. If they continue trading and the business loses money, they pay from their own pocket. Most executors understandably refuse this risk.

Option 3: Sell as a going concern. If the executor acts quickly, they may find a buyer willing to purchase the business while it's still operational. This preserves the most value but requires an executor with business acumen and the authority to act decisively.

There is one special exception: HMRC's CA15300 provision allows business transfers to a surviving spouse or civil partner to continue as if no cessation occurred. This prevents immediate tax charges but still requires probate and doesn't solve the frozen bank account problem.

Critical Problems with Sole Trader Death:

Your family doesn't inherit a business. They inherit frozen assets, urgent debts, and difficult decisions.

Inheritance Tax: How Each Structure Affects Your Estate

Inheritance tax (IHT) charges 40% on estate value above £325,000 (the nil-rate band). If you're leaving your main residence to direct descendants, you also get a residence nil-rate band of £175,000, bringing your total tax-free allowance to £500,000.

In 2022-23, 31,500 estates paid IHT, representing only 4.62% of UK deaths. Most estates fall below the threshold or qualify for reliefs.

The most powerful relief for business owners is Business Property Relief (BPR)—and it applies to both limited companies and sole traders, with important distinctions.

Business Property Relief: The Game Changer

Currently, qualifying business assets receive 100% relief from inheritance tax. This means no IHT is due on your business value, regardless of how much it's worth.

To qualify for BPR, you must:

  • Own a trading business (not investment or property holding)
  • Have owned the business for at least 2 years before death
  • Use assets primarily for business purposes

Limited Company Shares: Unlisted company shares qualify for 100% BPR if the company is a trading company. The relief applies to the full value of your shares. The key advantage is clean separation—shares are clearly business assets eligible for relief.

Sole Trader Business: Business assets (equipment, stock, goodwill) qualify for 100% BPR if you operated a trading business. But because sole traders mix personal and business assets, it's harder to ring-fence which assets qualify. A home office, a vehicle used partly for personal use, or excess cash in business accounts can complicate BPR claims.

Example Comparison:

Both structures, £800,000 business value, £200,000 other assets (property, savings), total £1 million estate:

Limited company:

  • £800,000 shares qualify for 100% BPR = £0 IHT
  • £200,000 other assets exceed nil-rate band by £175,000
  • £175,000 × 40% = £70,000 IHT
  • Total IHT: £70,000

Sole trader:

  • £800,000 business assets qualify for 100% BPR = £0 IHT
  • £200,000 other assets exceed nil-rate band by £175,000
  • £175,000 × 40% = £70,000 IHT
  • Total IHT: £70,000

Same outcome—but sole trader has higher risk of HMRC challenging relief due to mixed personal/business assets.

In 2022-23, £5.28 billion was claimed in business and agricultural property relief, demonstrating how significant this relief is for reducing IHT.

Important Caveat: BPR is not automatic. HMRC can challenge if your business has investment characteristics, doesn't trade actively, or holds excess cash beyond operating requirements. Limited companies with clear trading activity and formal structures face fewer challenges than sole traders with mixed assets.

The 2026 Business Property Relief Changes You Need to Know

From 6 April 2026, Business Property Relief rules change significantly.

The £1 Million Cap

The first £1 million of combined business and agricultural property will receive 100% relief. Any value above £1 million will receive only 50% relief—meaning an effective 20% IHT rate instead of 40%.

Additionally, unlisted company shares will see relief reduced from 100% to 50% for the portion above the £1 million threshold.

Impact on Limited Companies:

If your limited company shares are worth more than £1 million, you'll pay 20% IHT on the excess.

Example: £2 million company shares

  • First £1M: 100% relief = £0 IHT
  • Remaining £1M: 50% relief = £500K taxable at 40% = £200,000 IHT
  • Total IHT: £200,000

Impact on Sole Traders:

Same cap applies. If your sole trader business assets exceed £1 million, you'll pay 20% effective IHT on the excess.

Example: £2 million sole trader business assets

  • First £1M: 100% relief = £0 IHT
  • Remaining £1M: 50% relief = £500K taxable at 40% = £200,000 IHT
  • Total IHT: £200,000

Comparison Table:

Business Value Current IHT (2024) From April 2026 IHT Increase
£400,000 £0 (100% BPR) £0 (within £1M cap) £0
£1.5 million £0 (100% BPR) £100,000 (50% relief on £500K excess) £100,000
£3 million £0 (100% BPR) £400,000 (50% relief on £2M excess) £400,000

Strategic Implications:

If your business will exceed £1 million, structure matters less for BPR purposes—both hit the same cap. But limited company structure still offers critical advantages: limited liability protection and operational continuity after death.

Urgency Factor: If your business is currently worth less than £1 million but growing, write your will NOW. For deaths before 6 April 2026, full 100% relief still applies to the entire business value. After that date, you're subject to the £1 million cap.

Planning Strategies:

  • Lifetime gifting: Gift shares or business assets during your lifetime (7-year rule applies)
  • Spousal exemption: Transfers to spouse are always IHT-free, preserving both £1M allowances
  • Trusts: Consider using trusts to manage the £1M allowance across generations

Approximately 2,000 estates per year will be affected by the £1M BPR cap, while 3,000 estates will continue receiving full 100% relief because their business values fall under the cap.

Limited Liability vs. Unlimited Liability: Protecting Your Family's Assets

The liability structure you choose today determines whether business debts can destroy your family's inheritance tomorrow.

Sole Trader: Unlimited Liability

As a sole trader, you're personally liable for ALL business debts with no limit. If your business owes £200,000 but only has £100,000 in assets, that £100,000 shortfall comes from your personal estate.

Creditors can pursue your family home, savings, and investments to settle business debts after your death. Your executor must pay business debts from the estate before distributing inheritance to your family.

If debts exceed assets, your family inherits nothing—or worse, a negative estate where they must sell the family home to satisfy business creditors.

Tom, 48, ran a building firm as a sole trader. He died owing £180,000 to suppliers and HMRC after several projects failed. His business assets—a van and tools—were worth only £35,000.

Creditors pursued his estate for the £145,000 shortfall. His family had to sell the house, which had £250,000 in equity. After settling business debts, his widow and two children received only £105,000. The inheritance Tom intended to leave was destroyed by unlimited liability.

Limited Company: Limited Liability

A limited company is liable for business debts—not you personally. Creditors can only pursue company assets. Your personal assets (home, savings) remain protected from business creditors.

When you die, company debts stay with the company. They don't transfer to your estate or reduce your family's inheritance.

Critical Exception: If you gave personal guarantees for business loans, leases, or supplier credit, those guarantees survive your death. The creditor can claim from your personal estate for guaranteed amounts. Always review what you've personally guaranteed.

Estate Planning Comparison:

Scenario 1: Sole trader with debts

  • £300,000 business assets
  • £150,000 business debts (suppliers, loan, unpaid tax)
  • £200,000 personal assets (home equity)
  • Dies
  • Estate calculation: £300K + £200K - £150K = £350,000 net estate
  • Family inherits £350K minus IHT

Scenario 2: Limited company with debts

  • £300,000 company assets
  • £150,000 company debts
  • £200,000 personal assets
  • Dies
  • Estate calculation: £200K + company shares (net value £150K) = £350,000 net estate
  • Company debts stay with company
  • Family inherits £350K net, protected from company creditors

Critical Difference: Business Failure

Sole trader: Business owes £200K, assets worth £100K, shortfall £100K comes from personal estate. Family home at risk.

Limited company: Company insolvent, creditors claim company assets only. Personal estate protected (unless personal guarantees given).

This protection extends beyond death. If your business fails during your lifetime, limited company structure protects your personal assets. If it fails after your death, your family's inheritance is protected from business creditors.

Which Structure is Better for Estate Planning?

Limited company structure offers superior estate planning benefits in almost every category except simplicity and upfront cost.

Limited Company is Better for Estate Planning When:

  • Business will be worth more than £500,000 (better asset protection and BPR planning)
  • You have significant business debts or liability risk (contractors, professional services, anyone with employees)
  • Multiple people are involved (shareholders, investors, succession complexity)
  • You want the business to continue operating after death (separate legal entity)
  • Estate planning priority is protecting family assets from business creditors
  • You're prepared for higher admin costs (£500-1,200/year for accountancy, Companies House filing)

Sole Trader is Adequate for Estate Planning When:

  • Business will stay small (under £100,000 value)
  • Very low liability risk (no debts, no employees, no contracts)
  • No plans for business to continue after death (executor can wind down)
  • Simplicity outweighs asset protection (lower admin burden)
  • Total estate well under IHT threshold (under £325,000)
  • You're confident business won't generate debts that threaten personal assets

Decision Matrix:

Factor Limited Company Sole Trader
Asset protection ✓ Personal assets protected ✗ Personal assets at risk
Business continuity ✓ Company continues operating ✗ Business ceases on death
Frozen bank accounts ✓ Accounts remain operational ✗ Accounts frozen until probate
Inheritance tax planning ✓ Cleaner BPR application ⚠ Mixed personal/business assets
Administration after death ✓ Simpler (transfer shares) ✗ Complex (probate + wind-down)
Setup complexity ✗ More complex (£12-50 + filing) ✓ Simple (register with HMRC)
Ongoing admin ✗ Annual accounts, CT600, confirmation statement ✓ Self-assessment only
Will complexity ⚠ Must check articles of association ✓ Straightforward (business = personal assets)

Key Insight: If your business has any material value (over £50,000), any limited liability risk, or any employees, limited company structure protects your family better. The upfront complexity and ongoing admin costs are small prices to pay for protecting your family's inheritance from business debts and ensuring business continuity.

How to Include Your Business in Your Will (Step-by-Step)

Your business structure determines what you actually own and what your will should include.

For Limited Company Owners:

Step 1: Review Company Documents

Download your articles of association from Companies House or company records. Check for:

  • Pre-emption rights (shareholders' right to buy shares first)
  • Transfer restrictions (who can own shares)
  • Forced sale clauses ("deemed notice" triggering buy-sell on death)
  • Obtain any shareholder agreements (may override will)

Step 2: Identify What You Own

You own shares in the company—not the company itself, not the business assets. Check your share certificate for:

  • Number of shares
  • Class of shares (ordinary, preference)
  • Percentage ownership

Step 3: Decide What to Do with Shares

Choose one:

  • Leave to specific person (spouse, child, business partner)
  • Leave to multiple beneficiaries (creates joint ownership—may need shareholder agreement)
  • Instruct executor to sell shares (provide valuation method)
  • Place shares in trust (for minor children or asset protection)

Step 4: Appoint Capable Executor

Choose someone who:

  • Understands your business
  • Can work with remaining directors/shareholders
  • Has authority to act as director if needed (may require board resolution)
  • Consider appointing co-directors as co-executors for business continuity

Step 5: Provide Business Continuity Instructions

Create a document with:

  • Location of company records, bank details, HMRC login
  • Accountant contact information
  • Key clients, suppliers, employees
  • Outstanding contracts, leases, loans
  • Instructions: continue operating, sell shares, or wind down?

Step 6: Address Personal Guarantees

List any personal guarantees for business loans, leases, supplier credit. These survive your death—ensure estate has funds or insurance to cover them.

Step 7: Draft Will with Specific Share Bequest

Example wording:

"I give all my shares in [Company Name] (Company Number: XXXXXXXX) to [Beneficiary Name] absolutely, subject to the provisions of the company's articles of association and any shareholders' agreements."

For Sole Trader Owners:

Step 1: List All Business Assets

Document:

  • Physical assets: equipment, stock, vehicles, premises
  • Intangible assets: goodwill, client lists, intellectual property, domain names
  • Financial assets: business bank accounts, receivables (money owed to you), deposits

Step 2: List All Business Debts

Record:

  • Loans, overdrafts, supplier credit
  • Unpaid tax (income tax, VAT, National Insurance)
  • Lease obligations, employee wages owed

Step 3: Decide What Executor Should Do

Choose one:

  • Wind down business (sell assets, collect debts, pay creditors, distribute remainder)
  • Continue trading temporarily (to complete contracts, sell as going concern)
  • Transfer business to family member (if HMRC conditions met for spouse/civil partner)

Step 4: Appoint Capable Executor

Choose someone who:

  • Understands your business
  • Has authority to collect debts and sell assets
  • Can handle HMRC, VAT, Companies House
  • Knows key contacts (bank, accountant, suppliers)
  • Consider business-savvy person even if not family member

Step 5: Provide Detailed Business Information

Create "Business Continuity Document" with:

  • Bank account details
  • Accountant contact
  • HMRC login credentials
  • Supplier list with contact details
  • Client contact information
  • Outstanding contracts
  • Location of business records
  • Insurance policies
  • Lease/rental agreements

Step 6: Address Bank Account Freeze Risk

Strategies:

  • Maintain personal reserve fund to cover 3-6 months business obligations (wages, rent, tax)
  • Consider joint business account with trusted person (spouse, business partner) if continuation planned
  • Ensure executor knows bank will freeze account immediately on death notification

Step 7: Draft Will with Clear Instructions

Option A—Residuary estate (business assets included with all other assets):

"I give all my residuary estate to [Beneficiary] absolutely."

Option B—Specific bequest of business (if you want business kept separate):

"I give my business known as [Trading Name], including all business assets, equipment, stock, goodwill, receivables, and intellectual property, to [Beneficiary], subject to payment of all business debts and liabilities."

Critical instruction for executor:

"I direct my executors to pay all my business debts and liabilities from my business assets before distributing the business or its value to my beneficiaries."

BOTH Structures: Essential Will Provisions

  1. Executor Powers: Grant executors express power to continue/wind down business, collect debts, sell assets, employ professionals (accountants, business valuers)

  2. Professional Advice: State that executors should obtain accountancy advice (business valuation, tax implications), legal advice (if shareholder disputes or complex assets), and business valuation (for IHT purposes, share sales)

  3. Letter of Wishes: Consider separate non-binding letter explaining:

    • Why you chose this structure
    • Your vision for business continuation or closure
    • Key relationships (clients, suppliers, employees)
    • Passwords and access to digital business assets

Your will protects your business only if it accurately reflects what you own and provides clear instructions aligned with your business structure.

FAQs: Limited Company vs. Sole Trader Will Questions

Q: What happens to a limited company when the owner dies?

A: When a limited company owner dies, the company continues to exist as a separate legal entity. The deceased's shares pass according to their will or the company's articles of association. If properly structured, the business can continue operating without disruption, with shares transferred to beneficiaries who become the new shareholders.

Q: What happens to a sole trader business when the owner dies?

A: A sole trader business legally ceases to exist when the owner dies because the business and individual are the same legal entity. All business assets become part of the deceased's personal estate, bank accounts are frozen until probate, and the executor must decide whether to wind down the business, sell it as a going concern, or continue trading temporarily.

Q: Does business structure affect inheritance tax on my estate?

A: Yes, significantly. Limited company shares may qualify for 100% Business Property Relief (reducing to a £1M cap from April 2026), potentially eliminating inheritance tax on business assets. Sole trader business assets are part of your personal estate and subject to the standard £325,000 nil-rate band, though trading businesses may also qualify for Business Property Relief if held for over two years.

Q: Can I include my limited company in my will?

A: You don't include the company itself in your will—you include your shares in the limited company. These shares are your personal assets and can be left to specific beneficiaries. However, check your company's articles of association first, as these may contain restrictions on share transfers that override your will.

Q: Should I change my business structure to protect my family?

A: The decision depends on your specific circumstances. Limited companies offer better asset protection, limited liability, and potentially superior inheritance tax planning through Business Property Relief. However, they require more administration. If your estate will exceed £325,000 or you have significant business debts, a limited company structure may better protect your family's inheritance.

Q: What is Business Property Relief and how does it work?

A: Business Property Relief (BPR) reduces the value of business assets for inheritance tax purposes. Currently, qualifying business assets receive 100% relief, meaning no inheritance tax is due. From April 2026, the first £1 million of combined business and agricultural property receives 100% relief, with 50% relief on any excess. To qualify, you must own the business for at least two years before death.

Q: Will my business bank account be frozen when I die?

A: Yes, for sole traders, business bank accounts are frozen when the bank is notified of your death, preventing access until probate is granted. This can create cash flow problems for paying employees or suppliers. For limited companies, business accounts remain operational because the company is a separate legal entity, though signatories may need updating.

Conclusion

Key takeaways:

  • Limited company structure offers superior estate planning protection in almost every category: asset protection, business continuity, operational bank accounts, cleaner inheritance tax planning, and simpler administration after death.
  • Sole trader businesses cease to exist when you die, with frozen bank accounts, trapped assets, and business value declining 60-80% during probate—unless your executor acts quickly or transfers to spouse.
  • Both structures can qualify for 100% Business Property Relief currently, but from April 2026, only the first £1 million receives full relief, with 50% relief on excess—making structure choice less about tax and more about liability protection.
  • Your company's articles of association may override your will if you own a limited company, so review them before finalizing will provisions to avoid forced sales or transfer restrictions.
  • Create a detailed business continuity document for your executor with bank details, accountant contacts, key relationships, and clear instructions—this document is as important as your will for protecting business value.

Marcus researched every aspect of his business structure except the one that mattered most to Emma. Your business structure shapes your professional life, but your will protects your family's future. The two decisions are inseparable—make them together, make them informed, and make them now.

Understanding how your business structure affects your will is the first step. Creating a legally valid will that protects your business and family is the second—and it's simpler than you think.

With WUHLD, you can create your complete, legally binding will in just 15 minutes online.

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  • A Witness Guide
  • A Complete Asset Inventory document

Whether you're a limited company owner or sole trader, WUHLD guides you through including your business assets, appointing the right executor, and ensuring your family is protected. You can preview your entire will free before paying anything—no credit card required, no obligation.

Don't let your business structure decision be undermined by missing will planning.

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Continue your business estate planning with these essential guides:

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

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