By Louise Misiewicz
Are you looking to give shares to family members that work within your business?
Are you looking to reduce your IHT liability if the business should increase in value?
You may be looking to allocate shares to your children and other family members in the future. You may even be thinking of protecting yourself against Inheritance Tax liabilities (IHT) in the future in the event of your business increasing in value.
Freezer-shares, otherwise known as growth shares, is a well-used vehicle for property investors, doctors, dentists and other medical professionals to pass on their business down the generations.
Our team of property tax experts are on hand to best advise our clients on how to create freezer shares in your business, to prevent the issue of IHT and unnecessary income tax charges.
One of the issues we have seen in our work with property investors and health care professionals is the issue of giving shares away to their children, and for them to suffer a Capital Gains Tax (CGT) liability.
Using Freezer-shares allows you to stop further IHT issues if the business growth in value without attracting CGT. This is because you are not actually going to transfer existing shares of your Limited Company rather than creating new shares that take the enjoyment of capital growth of the business.
For property investors the value of their Limited Company may increase in value if the property market improves. For health care and medical professionals, the company value will increase as they grow their business.
If the value of the company increases, it can cause their parents to exceed the £325,000 for individuals and £650,000 for couples IHT allowance. Any surplus above these amounts would then become chargeable at 40%.
I have written an article here that shows many ways how you can minimise IHT.
Freezer-shares will not have any voting rights, so there is no dilution of control. Nor will they be entitled to dividends.
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Benefits of Freezer-shares and Entrepreneurs Relief at 10% on disposal
Provided that the conditions below are met, the family member that receives the Freezer-shares will be entitled to Entrepreneurs Relief at 10%, rather than Capital Gains Tax (CGT) at 10% (for basic rate tax payers) or 20% (for high rate tax payers).
- The company must be a trading company or the holding company of a trading group;
- The individual must have been an employee or office-holder; and
- The company must be the individual’s “personal company” (being a company in which they hold at least 5% of the ordinary share capital when tested by nominal value and 5% of the voting rights).
Please note that the majority of property investors reading this section will not be too happy. The reason for this is that buy-to-hold property investments will not be considered to be a trade.
As such, Entrepreneurs Relief is not applicable. However, healthcare, medical professionals, and property developers will benefit from this tax relief.
I have already written a separate article here that discusses how IHT can be minimised through Hold Over Relief.
This is a method that allows the company value to pass to their children without IHT liabilities. This has a knock-on effect that if the child subsequently sells the business, the deemed cost value is potentially reduced to nil, and Capital Gains Tax (CGT) is only payable on the money actually received.
I also wrote an article here about how to set up a company using alphabet shares (otherwise known as ABC shares) to help plan who gets what income in the form of dividends, and what voting rights each shareholder has.
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The practical steps of creating freezer-shares
OK, now we have identified the benefits of creating freezer-shares, how is it done on a practical level? If you follow the below steps, then you won’t go wrong:
- The articles of your Company are amended to create a new class of shares of 1p each with no rights. They will be able to benefit from the money obtained through the company disposal. These shares are pro-rata with ordinary shares, but only after ordinary shares have received a hurdle amount of say £5 per share, which is agreed up-front.
- There should be an option for the company to buy back the shares at 1p if, for whatever reason, the family member leaves the company or if there is any falling out.
- The family member will need to pay up the 1p for each share that has been allocated.
- The family member needs to make an election in relation to section 431(1) ITEPA 2003, which requires them to pay income tax on the unrestricted market value of the growth shares within 14 days of acquisition. The family member can gain clearance from HMRC to say that the value of the growth shares does not carry an income tax liability as the market value had been paid.
You need to get valuation advice so as to set the hurdle applicable to the growth shares at such a level to avoid or minimise any income tax charges arising on acquisition.
After 6th April 2016, HMRC require companies and participants to retain a valuation agreement. This then protects the company and individuals from any unnecessary claims of income tax and national insurance.
As HMRC shows that the open market value of any of these assets is relevant to your tax affairs, your tax office may ask SAV to consider and, if necessary, negotiate the value with you.
You may have already passed an asset to another person, but still need to enter it on your tax return. Where it’s difficult to establish market value, SAV can help. This is called a Post Transaction Valuation Check. (PTVC).
Here you can find out:
- how share and assets valuations are made
- how to submit or prepare a valuation of assets
- contact details for SAV
Property investors and developers please note SAV doesn’t value UK land or buildings for tax purposes. The Valuation Office Agency does this.
There is no requirement to offer participation in such schemes to all employees and the company has discretion as to who participates.
Finally, I strongly recommend working with experienced solicitors whom will draft the share plan and associated documents including the necessary changes to the company’s Articles of association.
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