Safeguarding a share of the family firm from IHT

A special relief usually protects business assets from inheritance tax (IHT). But protection can be lost where there is a shareholders’/partners’ agreement in existence. What’s the problem and how can you resolve it?

Continuity of business

To keep a family business intact, it’s a good plan to draw up an agreement between the business partners, or in the case of a company, the shareholders. Amongst other things this should include a clause which states that if a partner/shareholder dies, their executors must sell their share of the business to the other owners. The wording of the clause can have serious inheritance tax (IHT) consequences.

Business property relief

Company or partnership shares in most trading businesses qualify for IHT business property relief (BPR) as long as the seller has owned them for two years or more. The effect of BPR is to exempt business assets, e.g. shares in a company or partnership, from IHT. But there’s an exception.

Trap. Where an individual commits to selling their share of a partnership or company, they’ll lose BPR on those assets. This means if they die between signing the sale agreement and completion, the assets will count as part of their estate on which IHT is payable, but without the benefit of BPR.

What counts as a binding agreement?

Although there might be decades between signing a shareholders’ or partners’ agreement, HMRC will consider it as a sale agreement and caught by the trap above where:

  • the company or partnership shares are transferred on death to the deceased’s personal representatives; and
  • the personal representatives are required to sell the assets to the surviving shareholders or partners; and
  • they are obliged to by them.

Agreement re-write

The good news is that once you identify that there’s an IHT problem with a shareholders’/partners’ agreement it’s relatively easy to resolve it. There are broadly two ways you can rewrite the agreement to achieve the right result.

Tip 1. Include an option for the surviving shareholders to buy the deceased’s share of the business if they die. By giving the remaining shareholders the option to buy rather than stipulating that they must do so, it doesn’t count as a sale agreement.

Tip 2.   If you do not want to create an option, a clause can be added in the agreement and a matching one in the wills of each shareholder/partner which says that all business assets pass to the surviving owners direct. Partnership assets usually pass like this automatically without an agreement, but it never hurts to make sure.

Keep track

As with any agreement that can affect the value of an estate for IHT purposes, a signed copy should be kept with the will of each shareholder or partner.

IHT business property relief (BPR) is lost where a shareholder’/partners’ agreement obliges the executors to sell a share of the firm and for the remaining members to buy it. Rewrite the agreement and replace the “obligation to buy” clause with an “option to buy”. BPR won’t then be lost.