Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about transferring shares for the benefit of the grandchildren of a company’s controlling shareholder.
‘We have been asked to advise the controlling shareholder in a small trading private limited company. He wants to know about transferring shares to his grandchildren either out of his own holding or by way of alphabet shares. Obviously, this would be to enable them to take advantage of their own tax allowances. They do not have any other income so this will, for example, help with school fees.
This is a complicated issue bringing in capital gains tax, inheritance tax and income tax, not to mention trusts.
It has been suggested, for example, that the shares could be put into a bare trust for minor grandchildren so as to keep control of the holding. The dividends could then be mandated direct to the beneficiaries, so avoiding the need for tax complications by way of simplifying the administration for the trustees.
What do readers think of this approach? Is it likely to be effective or are there potential problems?’ Query 19,685 – Addis.
Terry Jordan’s reply: Should a bare trust be set up, business property relief may not be available.
‘Grandfather is the controlling shareholder in a small trading private limited company and is considering transferring shares to his grandchildren who are apparently minors. Bare trusts have been mentioned.
Provided the shares have been owned for two years (newly created alphabet shares could be problematic), in grandfather’s hands they would apparently benefit from business property relief for inheritance tax purposes under IHTA 1984, s 104.
Gifts to bare trusts for the grandchildren would be potentially exempt transfers and should grandfather die within seven years the business property relief would be revisited and denied if the shares were no longer held by the transferees.
Note that a quirk with shares is that the company would not need still to be trading on grandfather’s death provided it had not been quoted on a recognised exchange and the shares had been retained. Although the minimum voting requirement for the higher level of relief on unquoted shares was abolished in April 1996, there could be a pitfall if grandfather personally owns land and buildings or plant and machinery used in the business of the company. The 50% relief afforded to such assets is available only to controlling shareholders so any gifts should not reduce his holding below 50%.
For completeness, gifts to more flexible trusts would be immediately chargeable and could have the effect of locking in a measure of relief. Although the relief would be denied on death within seven years if the shares had not been retained by the trustees the gift would not affect grandfather’s cumulative total (IHTA 1984, s 113A (2)).
The gifts would constitute disposals for capital gains tax purposes and holdover relief would be available under TCGA 1992, s 165 if the gifts are to bare trust or under s 260 if to more flexible trusts. Grandfather could face a clawback of the held over gain if the grandchildren or the trustees were to become non-UK resident in future.
While there is no bar on minors being registered as shareholders, there can be problems regarding the exercise of votes so having adults as bare trustees is usually preferable. If grandfather is to be a trustee, he should not exercise any voting rights for his own benefit so there is no question of a reserved benefit.
If the values are significant, a better course might be transfers to an interest in possession trust for the grandchildren. Dividend income could still be mandated to them so the trustees had no income tax liability, and the grandchildren could not demand the transfer of the shares at age 18. The shares would become relevant property for inheritance tax, but full business property relief would be available after two years’ ownership by the trustees.’
The article is also available on the Taxation website.
Our tax team have expertise in a range of areas including inheritance tax, business property relief and trusts. For more information, please get in touch with your usual BKL contact or use our enquiry form.
