It is never too soon to consider what happens to your business if you retire or die. Even if you mean to sell your business in your lifetime, do you wish to share the cash proceeds with your family? There are inheritance tax advantages in making gifts of shares, rather than the proceeds, while inheritance tax business property relief (“BPR”) is available, though you will need to carefully consider the effect the gifts will have on capital gains tax Entrepreneur’s relief.
If your children are to receive the business, will this happen in your lifetime or by your Will? Lifetime gifts can normally be made without an immediate tax charge but the shares will not be rebased on your death for capital gains tax purposes. If your shares are currently worth more than when you acquired them, any capital gain which has accrued on the shares, will be wiped out on your death and your beneficiaries will inherit them at their probate value.
Whatever type of gift you are considering, you need to think whether it is an outright gift or a gift via a trust. Tax considerations aside, direct gifts can be risky, if the recipient divorces, or becomes a bankrupt or is just profligate. A trust, on the other hand, can protect the underlying capital for your family. Trusts also will provide:
For gifts of shares in your Will, we always recommend a business trust which crystallises BPR on your death. BPR is generally available on shares in a private trading company which you have owned for two years before your death. BPR is a valuable relief as it can mean the shares’ whole value should not subject to inheritance tax. A business trust will ensure that the shares are ring-fenced in a favourable tax environment and can be particularly useful for cross-option arrangements, ensuring that inheritance tax free cash distributions can be made from the trust, in a ten year period after your death.
BPR is lost if the shares are subject to a binding contract of sale. Consequently, when making your Will, you should check your Company’s articles and any shareholders’ agreement to ensure that any pre-emption rights are couched as options rather than a sale contract. You should also review the shares transmission provisions to ensure that the Company’s directors cannot block share transfers and thereby defeat the terms of your Will.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.