IHT on minority shares in private limited company

[work.chill]

My mother has minority shareholdings (between 20% & 40%) in 4 UK private limited companies that let residential and commercial property. The value of the companies is around £20M. The other half of the family who together have a majority shareholding exclude my mother from decisions and pay out as little as possible to her. They don't want to buy her shares or do any share swaps to allow my mother to take control of just one company. The other family members operate the companies largely for their own benefit rather than in the interests of the companies and all shareholders.

We have been advised that the likely IHT bill for the shares alone will be around £1.5M.
My mother has other assets including 2 rented houses and money in the bank and company loans totaling around £800k. My mother lives in one of the company houses.

If my sister and I inherit the shares they will be of little benefit to us. We won't have any influence over the running of the companies or receive any income from them.
We would be happy to be rid of the shares so that we don't have a big IHT bill. We would be happy to receive the inheritance of the other assets on which the IHT is manageable.

We are concerned that the IHT bill of £1.5M for the shares alone will have to be paid using all of my mothers other assets. However even after using the £800k of other assets there will be a deficit. If my sister and I (who are also executors of my mothers will) receive the shares do we become personally liable to pay the remaining IHT? Could this mean that we have to pay it from our own savings?

Can we gift the shares to charity so that they are not included in the calculation for IHT or is it not allowed to gift private limited company shares? Would a charity be interested in receiving them?

We would appreciate any advice. Thank you.

[AGoodman]

You would be liable for IHT as executors so there is no personal liability but if you cannot raise the funds the estate would be insolvent and have to be run on that basis.

The IHT exemption should apply.

It seems to be a valuable asset regardless of problems. I would have thought that you should first consider whether anything can be done to improve your mother's position if the company is being run to her prejudice.

If you haven't taken proper advice then you should do so, because it has potential to cause some interesting tax problems - particularly with your mother living in a company property.

[AnthonyR]

As AGoodman states, you should definitely seek some advice on this.

From a practical point of view, if you were to gift the shares to a charity it would avoid the IHT and from my experience charities take such gifts quite seriously. They are also likely to pursue any right to income or minority shareholding rights quite aggressively which would put the remaining shareholders in a difficult (and often costly) position. Big charities have big legal teams and aren't afraid to use them if they don't feel they are being treated fairly.

Without suggesting any improper action, I would think that the threat of passing those shares to a charity should make the other shareholders sit up and take an interest in ensuring that it doesn't happen. That likely means coming to an agreement with you as to income or shareholding rights, or simply finding a way to buy out your mother's shares (before or after her death).

[work.chill]

Thank you for your responses.

AGoodman, to recap and check that I understand your response correctly:
The executors are liable to pay the IHT bill from the assets in the estate only and will never become personally liable from their own assets. This is good to hear as this is one of the things that scared us most of all.
The executors have to pay the IHT bill as far as possible from cash in the estate and from other assets in the estate that can be disposed of. Notice would have to be given to the tenants in the two rented houses so that they could move out and the houses be sold to raise money to pay towards the IHT bill.
With just the shares left in the estate there will still be a large amount of outstanding IHT. So the estate becomes insolvent and, like a bankruptcy, it goes to the administrators to sort out. On the one hand the administrators owe outstanding IHT and on the other they have the company shares. So the administrators attempt to make whatever they can out of the sale of the company shares in order to pay what they can of the IHT. I can only imagine that this would mean sale of the shares to the other side of the family which would probably be at a massive discount to the real value.

If this is how it is going to be then gifting the shares to a charity seems to be a better alternative. This way the charity can benefit and we can benefit from an inheritance of two rented properties and some cash. There would still be some IHT to pay but this would be manageable.

We have approached some charities to find out if these shares may be of interest to them.

AnthonyR, it is interesting to read that the idea of passing the shares to charity may make the other side of the family at last sit up and listen. For years now the other side of the family (who together own the majority of all 4 companies and have the greater influence over the company accountant) have got used to operating the companies to suit themselves to the detriment of my mother and father (who passed away recently). You are right, it would be uncomfortable for them to have to deal with an aggressive charity legal team who would demand proper running of the companies. This very thought might actually make them act. Up to now they have ignored my mothers requests to sort something out because the way it is now suits them. The perfect solution would be for some kind of share swap to allow my mother to take control of one company. This would give my mother peace of mind and a sense of accomplishment that she and her late husbands life work came to something. I’m sure that there are many other implications to be considered if this was done and would welcome any thoughts about this.

Yes we agree that we need to get some professional advice but part of the problem is knowing who we need to get advice from. Should we be looking to get advice from a tax advisor or solicitor or someone else?

[AGoodman]

You are mostly right save that an insolvent estate is usually administered by the PR's themselves (the people who take out the grant) rather than, say, a trustee in bankruptcy being appointed.

You need some tax advice on the current arrangements but I would have thought it was worth seeing a solicitor who specialises in shareholder disputes about the position generally. Treating a minority shareholder badly is called unfair prejudice and the Court can make a variety of orders, including winding up a company. I am not suggesting you jump into a claim but a firm solicitor's letter might bring them to the negotiating table.

See:

https://en.wikipedia.org/wiki/Unfair_prejudice_in_United_Kingdom_company_law

[kiwilondon99]

the use of companies act, now by Mother-do need to consult a lawyer [ & not the company lawyer !! ] as to a plan to implement
and to review any shareholder agreement which may be in place

review articles of association for each company - for director rotation + egm - noting specifically which "% shareholding " mother has to automatically block director actions [ ie approval of accoutns, etc ] eg if she has 40 % and articles/shareholder ageements require 50 or 66.6 or 75% votes to approve - then Mother has full blocking rights !!
ensure AGM held to approve accounts +/or directors, and accounts are received as a shreholder

could also forclose on loans... ?

you will need to consult a lawyer - but this woould allow value in the shareholdings and IHT planning could follow

[work.chill]

Thank you for your responses above. Here is an update, although little has changed.
My mother in her early 70’s is in good health but still in the same situation.
Mother has a IHT zero rate band of £650k following death of spouse a couple of years ago.
Mother purchased her own house for the first time in Jan 2020.
As per the first post, if mother dies while owning her shares the IHT due on the shares will be greater than the value of all her other assets. The shares can’t easily be converted to cash to pay the IHT. All of the other assets would need converting to cash to pay the IHT, but even after doing this some IHT would remain. Then mothers estate would become insolvent.
So we explored ways of disposing of the shares before mother eventually dies (hopefully some time off):
1. The shares were offered for the other shareholders to purchase. They must offer the market value but they don’t have funds available or even the inclination to think about how it might be done.
2. Gifting the shares to charity (exempt from IHT) but articles of association prevent this.
3. Serving a petition of prejudice as posted above. Mother got a letter drawn up but has not sent it because the case is not clear cut and could easily worsen the relationship with the other side of the family. Mother has visited several solicitors, it takes time for them to get up to speed. They start with good intentions but haven’t been able to provide a clear route forward.
4. Put the shares into a trust, but we don’t fully understand how a trust would work or even if this might have IHT implications.
5. PET gift of the shares to mother’s grandchildren. It is possible that one day the nephews might want to purchase the shares so this could bring some value. With the 7 year rule, we thought a 7 year limited term reducing life insurance policy could be used to mitigate against the possibility of IHT. Due to mothers age the 7 year premium might cost £100k but in the scheme of things seems worthwhile. If mother can get a life insurance policy in place this is probably the route she will follow.
Another possibility might be to gift the shares to the fellow shareholders in family B, either:
1. Now by a PET.
2. In mother’s final will.

Questions:
If the estate becomes insolvent, what happens to the shares, where do they go and what effect would this have on the companies/remaining shareholders?
Is a PET eligible to a fellow share holder?
Is the beneficiary of a PET liable for the IHT rather than the estate? https://www.moneymarketing.co.uk/view-from/who-pays-inheritance-tax/
Would it be possible to leave shares in final will and stipulate the beneficiaries also pay any IHT due on the shares? https://www.accountingweb.co.uk/any-answers/iht-on-private-co-shares
If the beneficiaries are liable for the IHT but don’t pay, is the estate then liable?

Any other suggestions or comments are most welcome. We have been struggling over this for several years and it is causing anxiety to my mother.
Thank you.

[AGoodman]

4. Is out - a transfer to a trust would incur immediate 20% IHT on the value above £325k.

Gift may be a sensible solution. She could create a bare trust which would keep the shares together but is still transparent for tax (ie. a PET to the grandchildren).

IHT on a failed PET is initially payable by the recipients of the gift but, failing that, the estate is also liable.

On an insolvent estate, the PR's initially try to realise the shares - they would have to obtain the best price they could bearing in mind any restrictions on sale. Ultimately, HMRC might be able to claim the shares if they could not be sold (but don't quote me on that).

You could probably find a way to leave the shares to beneficiaries on condition they pay the IHT but it does not remove the liability from the PRs. The beneficiaries could disclaim (refuse) the legacy.

It may be worth investing more in the corporate route - it is unlikely you need to win a court case, a legal letter usually focuses minds.

[work.chill]

Thanks for clarifying number 4 (transfer to a trust) and for your thoughts about the other ideas. Many avenues seem to lead to dead ends.
It seems crazy that the shares would give rise to IHT, which wipes out all the other assets including the shares themselves, leaving nothing to pass on.

Yes gift to grandchildren seems the best option if she can get the life insurance. Otherwise it would be a case of gifting them anyway and then taking a chance on the 7 year rule.
Grandchildren makes them sound young but they are all 18+ years old, knowing that would you still suggest a bare trust?
Yes, we do also need to try the legal letter.

[work.chill]

If the shares are passed to the grandchildren by a PET and the PET failed would the grandchildren be personally liable for the IHT?
That's the worry. Without insurance in place it wouldn't be possible for the estate to cover the whole amount of the IHT.
Where would that leave the grandchildren? Would they be liable for the remaining IHT or could they surrender the shares?
It would be good to make the PET to the grandchildren asap to start the 7 year clock but it feels too much of a risk to do it while mother hasn't yet got a life insurance policy in place.