How to close a UK business when the owner dies

What happens to a business when its owner dies depends on how the business was set up. The first thing to confirm is whether the person was a sole trader, a partner in a partnership, or the owner of a limited company, because each follows a different path, and in some cases the business does not close at all.

Whoever is dealing with the estate, the executor named in the will or the administrator if there is no will, usually takes this on. They are referred to below as the personal representative.

If the person was a sole trader

This is the simplest case. A sole trader and their business are legally the same thing, so the business ends when they die.

Its assets, such as stock, equipment and money owed to it, become part of the estate. Its debts become debts of the estate, to be paid before anything is shared out. The personal representative's job is to wind things down: collect what is owed, sell or distribute the assets, pay the creditors, and close the accounts.

There are a few practical steps:

Tell HMRC the person has died and the business has stopped trading. A final self-assessment tax return covers the period up to the date of death.
Cancel VAT registration and close the PAYE scheme if there were employees.
Tell customers, suppliers and anyone with a contract.

If the business had employees who had worked there for at least two years, they may be able to claim statutory redundancy from the estate.

If the person was in a partnership

This will depend on whether there was a partnership agreement.

If there was one, it usually says what happens on a partner's death, often allowing the business to continue and the surviving partners to buy out the deceased's share.

If there was no agreement, the default law applies. Under the Partnership Act 1890, the partnership is automatically dissolved when a partner dies. The surviving partners cannot take on new business; they can only finish existing work, sell assets, collect what is owed and pay the debts. Whatever is left of the deceased's share passes to the estate. Importantly, the estate stays liable for its share of partnership debts run up before the death.

The deceased partner's share counts as an asset of the estate. For income tax, their part of the business is treated much as a sole trader's would be on ceasing to trade. For Inheritance Tax, however, a partnership share will often qualify for 100% Business Property Relief (BPR) if it was held for at least two years, meaning no tax is paid on its value.

If the person owned a limited company

This is the most involved case, because a company is a separate legal entity. It does not die with its owner. The shares are property that passes through the estate, and the company itself carries on until someone decides what to do with it: keep it running, sell it, or close it.

Who can make that decision depends on who else was involved.

If there were other directors, they can keep running the company. The deceased's shares pass to the estate and then to whoever inherits them.

If the person was the sole director and the sole shareholder, the company is stuck until someone is given authority, and this is where families get caught out. The fix depends on the company's articles of association, its rulebook, filed at Companies House:

Most companies formed from October 2009 use the standard "model articles." These let the personal representatives of the last shareholder appoint a new director.
Older companies often use earlier rules ("Table A"), which have no such provision. The personal representatives must wait for the grant of probate, be entered on the register of members, and only then appoint a director. That can take months, during which the company's bank account may be frozen and bills cannot be paid. In some cases an urgent court application has been needed.

Once someone has authority, and if the decision is to close a solvent company rather than sell or continue it, there are two main routes:

Strike off (dissolution). For a company with no significant assets or debts that has stopped trading. You apply to Companies House on form DS01 for a small fee. First settle all tax, file final accounts and a final Corporation Tax return, close the VAT and PAYE schemes, and distribute anything left, because any money still in the company when it is dissolved passes to the Crown. HMRC must be sent a copy of the application and will object if tax is outstanding.
Members' voluntary liquidation. A more formal route for a solvent company with larger assets to distribute. A licensed insolvency practitioner handles it, and it is often more tax-efficient where the sums are significant.

If the company cannot pay its debts, it is insolvent, and a different process applies (a creditors' voluntary liquidation). In this circumstance professional advice is highly recommended.

Things that apply regardless of the structure

HMRC must be told. Final tax returns are due, and tax owed is paid from the business or estate before anything is distributed.
Debts come before inheritance. Creditors are paid first; only what remains passes to beneficiaries.
Employees have rights. They may be owed wages, notice or redundancy, which become claims against the business or estate.
Get advice on anything beyond the simplest case. Company closures, partnership disputes, insolvency and the tax on winding up are areas where an accountant or solicitor will save more than they cost.

A note on the rest of the UK

Most of the above applies across the UK, but with differences worth knowing.

In Scotland, a partnership is a separate legal entity in its own right, unlike in England and Wales, which can change how its affairs are wound up. Scotland also uses "confirmation" in place of probate, and Northern Ireland runs its own probate system, so the step of gaining authority over a company will follow a different route.