Shifting Value in a Family Run Business

In family run businesses, if the main shareholder is retiring but wants to keep his/ her stake to ensure he/she still maintains control, how can this situation be handles without being investigated by HMRC for inheritance tax?

Handing over the controls in a family run business can be problematic because in many situations the main shareholder though intends to retire doesn’t want to hand over the control to the next generation within a matter of days. One option would be for them to keep their shares but not draw the dividends. This will mean the money is available for the family members who’ll now handle the day-to-day running of the company. However, the financial planning and tax planning involved in this situation is not straight forward.

If a shareholder “waives his/her right to dividends” this doesn’t mean the others can take the dividends in their place. Instead, the undrawn dividends will accumulate as company profits and the only way for the other shareholders to draw this is by taking it as salary or benefits. But this isn’t the generally accepted option as tax efficient.

Inheritance Tax Planning

Where dividends accumulate in a company, this increases its worth, which in turn means the value of its shares also increase. Therefore, the wealth of the shareholder waiving the dividend falls while it increases for the other shareholders. HMRC defines this shifting of value a “disposition” and this is treated like a gift for Inheritance Tax purposes.

If you are unsure about the tax planning for the kind of situation mentioned above, it is advisable to contact an accountant for specialist tax advice. KVS Accountants has served a number of businesses as tax advisors in Putney, Fulham, Wimbledon, Hammersmith and Wandsworth to arrange tax planning in case of inheritance tax.


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