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  • A substantial portion of many business peoples’ net worth is tied up in their shareholding in a Limited liability Company (“the Company”).  The Company owns and operates the business but the business person’s ownership is represented by their shares in that Company.  This can present problems and opportunities when looking at succession issues both in terms of lifetime gifts or inheritances upon the business person’s death.

    The fundamental problem is that shares and company shareholding structures can be complicated and if not dealt with carefully can lead to unintended outcomes.  Good professional advice is absolutely necessary.  In this blog I am taking a brief look at some of the opportunities that shares can offer in succession planning.

    The shareholding structure in a Company which is typically laid out in the Memorandum and Articles of Association permits the creation of various classes of shares.  Different classes of shares can have different rights attaching to them e.g. voting or non-voting shares.   Using different share classes allows a legal framework to be put in place to regulate the relationship within the Company between a business person’s successors e.g. their children.  By way of a simple example, a child working in the family company may have shares with voting rights whereas other children not involved in day to day operations may have shares with no voting rights but which would still entitle them to share in the profits of the business.

    As the government struggles to increase its tax take, the likelihood is that the once generous tax reliefs available to permit the transfer of family businesses to the next generation without significant tax liabilities will be eroded.  This has started already in terms of the reduction in the Gift/Inheritance Tax Free Thresholds.  More cuts to tax reliefs are expected.  As a consequence, interest in tax planning around the use of company shareholding structures has become topical. 

    For instance, there is renewed interest in mechanisms that may allow children (even minor children) to receive a class of shares now in the family business that might not trigger a tax liability but which would allow that child to enjoy the benefit of future growth in the family company.  This has the effect of reducing the value of what he or she will receive in the future on the subsequent transfer of the remainder of the company shareholding from, for example, his or her parents.  This subsequent transfer may happen by way on gift on the retirement of the parents from the family business or it may happen upon the death of the parents.  It any event the value of what will be passing will be much less that it might otherwise have been, thus avoiding unnecessary capital taxes such as CAT, CGT or Stamp Duty.  

    The options are endless.