All the shareholders involved in the shareholder protection arrangement should write wills to make sure their intended beneficiaries get the proceeds without any intestacy delays.
Their shares will typically qualify for 100% business property relief for inheritance tax (IHT) purposes.
Shares in an unquoted trading company which have been held for at least two years will qualify for this relief. If this is the case, and the proceeds from the share protection arrangement are left under the terms of the will to the surviving spouse/civil partner, the relief has effectively been wasted since the survivor will then hold cash which is fully subject to IHT when they then die.
Where business property relief is available, the proceeds of the share purchase arrangement may be left to a will trust. In this way, the relief can be ‘crystallised’.
A discretionary trust will allow a range of beneficiaries, including the surviving spouse/civil partner, to get benefits from the trust. In the meantime the trust fund won’t fall within their estate for IHT purposes. In addition to the potential IHT savings, the trust may keep the funds outside of the survivor’s estate for long term care purposes.
A bypass trust is a discretionary trust where the shareholder’s children and spouse/civil partner will be included among the discretionary beneficiaries. The trustees can then pay income, capital or even make loans to any of the beneficiaries. The trust will be taxed under the relevant property regime outlined earlier.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.