Winding Up an Estate When the Person Who Has Died Was Self-Employed

If you’re responsible for administering an estate, your task may be made more complicated depending on the employment status of the person who has died. In many cases, the individual will have been retired at the time of their death, but if they were still working, there are likely to be some loose ends to be tied up in this respect.

This may become even less straight-forward if the person who has died was self-employed. In this post, we’re offering some general guidance on what this process might look like if you’re winding up an estate on behalf of an individual who was a sole trader, a freelancer or a self-employed consultant.

Understanding their employment status

Before you can make any decisions about winding up any business interests that form part of an estate, you’ll need to be sure that you have a full understanding of the whole picture. This is because the process will be different depending on how the person who has died managed their business interests. 

If someone was operating as a sole trader, freelancer or self-employed consultant, this means that their business was not registered as a limited company and they were not in partnership with anyone else. 

They will have needed to complete an annual self-assessment for HMRC each year. 

What happens to a business when a sole trader dies?

To all extents and purposes, if someone is a sole trader, then they are essentially the business. In other words, there is no legal separation between the individual and their business. 

This means that when a sole trader dies, generally their business legally dies with them and any assets belonging to the business would form part of the estate. 

Of course, there are some differences depending on what kind of business it is. If the person who has died was a self-employed consultant, or a freelancer selling specialist services such as illustration or photography, it’s unlikely that anyone else would be able to step into their shoes and continue trading after their death. 

If, however, the sole trader ran a business that sold products or more general services such as cleaning or catering, it might be more feasible for an executor to step in on their behalf.

In these cases, the personal representatives of the estate may be able to argue they have the right to continue trading on behalf of the estate. This is especially likely to be the case if there is existing inventory that needs to be sold, or if the business is going to be sold and it would be more advantageous to sell it as a ‘going concern’ rather than a business that has been closed down. However, it’s important to note that any profit made while doing this would belong to the estate, not to the personal representatives themselves.

Personal representatives also need to be aware that they could be held personally financially liable for any unprofitable business decisions. We’d advise any personal representatives considering trading on behalf of an estate to seek expert legal advice, as it may be possible to take steps to protect themselves from this liability. 

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What will happen to any business bank accounts?

What will happen to any business bank accounts belonging to a sole trader on their death will depend who was named on the bank accounts. If there was a second name on the account, such as a nominated successor or the sole trader’s spouse or civil partner, then ownership of the account would revert solely to them and the bank accounts would not usually be frozen. 

However, if there is only one name on the bank account, it is usual practice for the account to be frozen until later on in the probate process.

Different banks will have their own policies regarding what happens in these situations. We’d advise looking at the terms and conditions of any accounts to find out what the bank’s policy is on freezing accounts after a death. 

Ensuring all self-assessments are up to date. 

When an individual dies, their personal representatives will be responsible for ensuring their tax affairs are up to date as part of the process of administering their estate. 

If the person who has died was a sole trader, they will have been required by HMRC to complete an annual self-assessment return. Their personal representatives will need to complete a self-assessment on their behalf for the financial year in which they died. The personal representatives may also need to complete a self-assessment for the previous financial year if the person who has died had not yet submitted one.

What plans should sole traders make in advance?

Unfortunately, there’s no way of knowing what’s ahead. With this in mind, many business owners choose to put contingency plans in place long before they expect to need them. 

If you’re keen to ensure you have all eventualities covered for what might happen to your business in the future, we’d advise making sure you have set out clear instructions in your Will.

An experienced private client solicitor will be able to help make your wishes clear for the future on matters such as:

  • What you would like to happen to your business after your death.
  • Whether you wish to appoint a successor for your business.
  • What powers you wish to grant to your executors regarding your business.
  • Whether you wish business assets such as your bank accounts to be frozen.
  • Whether you would wish for your business to keep trading.
  • How you would want your business to be sold. 

We’re always on hand to support you to make legal plans for the future, both for yourself and for your business. Our team have a great deal of experience in these matters, and can advise on how to make your wishes for the future of your business water-tight. 

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