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How to use Trusts to gift shares of a family business

David Ford, Partner, Private Clients
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Many people are suspicious of Trusts. They have little knowledge of how they work, their purpose and for many when the word 'Trust' is mentioned, tax avoidance springs to mind.

What is a Trust and how is it used?

Trusts first developed in the UK in the 12th Century and were primarily used to convey ownership of land to a Trustee in the absence of the actual landowner who left the UK to fight in the Crusades.

In recent times Trusts are used to manage and protect assets, pass on assets while you are alive or when someone is too young to handle their affairs or cannot handle them because of incapacity.

Trusts involve a 'settlor', a 'trustee' and a 'beneficiary'. 

  • settlor puts the assets into the Trust
  • trustee manages the Trust
  • beneficiary benefits from the Trust.

What are the benefits of Trusts for family businesses?

Creating a Trust has tax implications but they can be advantageous if used in the right way.

When looking at a typical family owned business, the senior shareholders may want to pass on ownership of some or all of the shares to the next generation but are reluctant to do so because the next generation lack the skills and experience to actively be involved in the business making decisions. Transferring the shares into a Trust can help with the transition because the transferor can become a Trustee, allowing them to continue making the important business decisions while at the same time allowing the beneficiaries to enjoy the financial upside of the share ownership.

Trusts can also protect the family business from a divorce in a bad marriages and wayward children and allow the shares to remain in the trust to benefit future generations.

Under normal tax rules, gifting shares of a business to a connected person (generally a close family member) triggers a Capital Gains Tax (CGT) charge based on the current value of the shares. However, if the gift is made into Trust, the capital gain can be held-over which means the CGT charge is deferred until a future disposal of the shares by the Trust.

A transfer into a Trust triggers an Inheritance Tax (IHT) charge but if the value transferred is less than the current nil rate band of £325,000, no IHT is payable. When the assets gifted qualify as business assets for IHT purposes, a relief is available which can reduce the IHT to nil.      

For more information on the issues raised in this update, please see our article on the tax implications of Trusts or get in touch with your usual Crowe contact.

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David Ford
David Ford
Partner, Private Clients