highlights

  • Ownership of a business, particularly where family is involved can result in a host of different issues
  • Steps can be taken to protect assets, take advantage of tax planning opportunities and ensure appropriate succession arrangements
  • It is important that corporate and private client advisers work together to achieve the best planning solutions

One of my long standing clients Bradley Scott is a very wealthy entrepreneur. As I have prepared wills and Lasting Powers of Attorney for him in the past, I know his personal circumstances well. Bradley is in his early 60s and he and his wife Katie currently own all of the shares in Scots Engineering Limited, a company he formed in his early 30s with his former business partner John. Bradley bought out John’s shares in the early 90s following a disagreement about the direction of the business. Since then the business has gone from strength to strength and is now worth in excess of £10 million.

Bradley and Katie have two children, Freddie and Clare. Clare is happily married to Philip and has a young son, Oliver. Philip works at the company as the general manager and Bradley’s right-hand man. Freddie works for the company but due to some mental health issues is not able to take on any responsibility.

I have been trying to get Bradley to do some estate planning for some time so I am delighted when he gives me a call asking me to prepare a report with some initial ideals and recommendations.

In brief, my suggestions to Bradley are:

  • To review the company’s business property relief status Before undertaking any estate planning with shares in a company it is always essential to check whether or not the company can qualify for business property relief. Shares in an unquoted trading company will generally qualify for 100 per cent business property relief which will mean that the shares will be exempt from inheritance tax. This relief can however be restricted if the company holds assets which are not necessary for the company's business.

Common problems are having significant cash funds or holding investment properties. However, provided it can be shown that these investments are held as part of an investment business activity albeit a separate business from the main trading activity relief will not be restricted. With careful planning, it is nearly always possible to ensure that an unquoted trading company will qualify for 100 per cent relief.

  • Consider establishing a family trust Once it has been confirmed that Scots Engineering Ltd will qualify for 100 per cent business property relief it will then be appropriate to consider “capturing” some of this relief while it is available. This can be done by making a transfer of some of the shares into a family trust from which Freddie, Clare and Oliver can all benefit. A gift of shares into a trust will not trigger any tax charges as any capital gain can be held over, the business property relief avoids any inheritance tax charges and no stamp duty is payable on a gift.
  • Convert some ordinary shares into preference shares Bradley is very conscious that when he finally retires Philip will takeover the reins and while he totally trusts Philip, Bradley wants to make sure that Freddie has regular income above his current salary. As the payment of dividends is at the board of directors discretion, I suggest that Bradley creates some preference shares which pay a commercial rate of interest. Bradley will give these preference shares to Freddie so that Freddie can receive the interest to top up his salary.
  • To establish an Enterprise Management Incentive (EMI) share option scheme Philip is Bradley's natural successor in the company and Bradley is very confident in Philip’s ability to continue to develop the business and maintain its success. Also key to the business is Roger the finance director. Bradley would like to start the process of moving more and more day-to-day control to Philip and Roger to enable him to have the time to pursue his love of sailing. Bradley has previously considered giving Philip and Roger a direct share in the business in order to incentivise them and ensure he retains their services.

I have suggested that Bradley can achieve this tax efficiently by granting Philip and Roger options to acquire shares under the EMI scheme. Under the EMI scheme, options granted over shares at their current market value do not trigger any tax charges when those options are subsequently exercised. Options over shares worth up to £120,000 can be granted to each of Philip and Roger. Where the company is worth £10 million, £120,000 may represent a holding of 20 per cent of even more (after allowing for the discount given when valuing a minority holding. By this method, Bradley could choose to pass on significant holdings to make Philip and Roger real partners in the business).

  • Put in place a Shareholder’s Agreement Bradley has a clear vision on how he would like the company to be run for the benefit of the family while ensuring that his employees are well paid and incentivised. Following the planning, the company may have a much wider class of shareholders with shares held by Freddie, Philip and Roger (following the exercise of their options), the family trust and Bradley and Katie (assuming they retain some shares). Given the number of shareholders it will be helpful to put in place a shareholders’ agreement that will set out key principles such as how the board of directors is structured, how information is reported to shareholders and the family generally, dividend policies, and share transfers.

Given the number of issues raised and the variety of options available as a next step it is suggested that Bradley and Katie have a meeting with me, as their private client lawyer and a corporate lawyer who is used to assisting in these difficult areas