Family business options to share value
The Tax Discussion Group recently revisited issues of a family business, this time looking carefully at the options available for share ownership between the parents and their children.
This month one accountant returned to a client he had previously discussed. He explained he had a family company and their shareholders as clients. The company is owned by six shareholders, four adult children and their parents. The parents are over 75 years old, and concerned regarding succession planning.
The company’s ownership structure is:
- Father – 49%
- Mother – 11%
- Each child has 10%
The company has been successful and the accountant has concerns that the value of the non-trading assets it owns exceeds 50% of the company and as such it is not eligible for trading relief such as s165 TCGA holdover relief for gifts of business assets.
The accountant wished to confirm the basis of valuation of company shares for the father and mother, and whether they should alter the shareholdings they have in the company.
The discussion concerned:
- The equalization of the respective estates of the parents, such that each of them jointly owned less than 50% of the company. This would mean that they would no longer be subject to the ‘control premium’ when valuing the shares.
- Currently the father’s shares would be valued as 49/60ths of a 60% share. This means that the ‘controlling premium’ when valuing the company is shared between the parents.
- The health of the parents to ascertain whether there was potential scope for gift of the company shares into trust for the children and their grandchildren. This would allow future growth in the value of the trust shares to be outside the respective estates of the parents.
- A gift of 11% of the company would pass control over the company from the parents to the children. However, by gifting the children 11% of the company, only one child would need to agree with the parents in the event of a dispute. Furthermore, none of the children would have more than 15% of the company and hence any company valuations in the event of a divorce or other financial settlement would not be prohibitive.
- It would also potentially allow the shares owned by the trust to escape the charge to Inheritance Tax should one of the parents survive for more than seven years.
- Finally, by equalizing the shares it would allow the possibility of utilising the uplift to probate value to transfer more shares to the children at the time when the first parent should pass away.
Each month (with the exception of July and August) the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending.
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