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  • Overview

    Budget 2020 saw amendments to Entrepreneurs' Relief (ER), which were widely expected. ER reduces the rate of capital gains tax (CGT) on disposals of certain business assets from 20% to 10%, subject to a lifetime limit. Before the Budget the lifetime limit was set at a generous £10m. This has now been reduced to £1m. The reduction of the ER lifetime allowance makes gifts of qualifying shares, either outright or into trust, to the next generation more attractive.
    Qualifying shares may be given outright.  The recipient will take the shares subject only to the restrictions and conditions set out in the company’s articles of association and the terms of any shareholder agreement. A gift to a trust provides the person making the gift (the settlor) with greater security and control.  Voting rights attaching to the shares will be exercisable (in the best interests of beneficiaries) by agreement of the trustees, who may include the settlor.  In this way, fragmentation of ownership can be avoided, along with the potential for conflict between family members participating in the business and those who aren’t.

    A gift of qualifying shares to an individual is what is called a potentially exempt transfer (PET) with no upfront inheritance tax (IHT) liability.  Gifts into trust are chargeable, but no IHT will arise if 100% business property relief (BPR) applies, so substantial gifts of shares worth more than the settlor’s unused nil rate band threshold (currently £325,000) can be made.  Lifetime trust creation is usually restricted to the amount of the threshold to avoid a 20% entry charge on the excess.  However, BPR will enable a parent/grandparent to set aside significantly more valuable assets within a trust for the benefit of the wider family. 

    If the donor survives either kind of gift by seven years the shares will have been successfully taken outside of his or her estate.

    The ability to defer a tax charge on accrued capital gains means that CGT should not generally be a problem with gifts of unquoted trading company shares.  When the gift is to an individual, business asset hold-over relief may be relevant.  Full deferral may be claimed where the transfer is to a trust.  If the shares are subsequently moved out of the trust into the hands of family beneficiaries, further hold-over relief may be claimed, so that eventually gains are either realised on a future disposal by the beneficiaries or extinguished when they die.

    Like ER, BPR is also very generous and many of us anticipated changes to that relief too in the Budget. If loss of BPR is a distinct possibility in future, lifetime gifts (either out right or into trust) to next generation, where the value of the business owner’s shares exceeds £1m, now seem very attractive, while still possible. 

  • Related Services

    Later life planning

    Our team of specialist lawyers has a wealth of knowledge and experience in providing advice on the law as it affects your later life. We pride ourselves on offering sympathetic and practical advice to our clients.

    Wills, Trusts & Tax Planning

    Our specialist lawyers provide high quality, intelligent advice that is comprehensive, considered and clear.

    Wills, gifts and other applications

    Our Court of Protection team is one of the most experienced in the country in advising deputies and attorneys on formal applications for gifts, wills and property transactions, such as applying to the Court for authority to replace a co-owner of a property who has lost capacity.

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Jargon Buster