How To Arrange The Passing Of Business Shares On Death
The passing of business shares on the death of a business partner who is not a spouse requires careful planning. If you are considering selling business shares to a non spousal partner this area requires experienced advice.
To avoid business shares falling into a person’s estate and the surviving owners losing control of a business, many business owners set up share purchase agreements. The usual objective of agreements for the sale and purchase of a share in business between the owners in the event of the death one of them is that the beneficiaries of the deceased sell their share to the surviving partner. Unfortunately, using the wrong type of share purchase agreement can result in the surviving business partner being denied business property relief. However, the terms of this should not be obligatory.
Historically HRMC has regarded this kind of agreement as binding, as and such made the transfer of shares on death ineligible for business relief, for IHT purposes. Equally, for IHT purposes, the transfer of the share could be passed into a trust.
It is worth noting that HMRC will accept that in the passing of business shares a double option agreement is not a binding contract for sale (Statement of Practice SP12/80) and this will not prejudice business property relief.
Interestingly, this is despite the fact that the double option agreement states that if one party decides to exercise their right to buy or sell, the other party is bound to comply. If both parties decide not to exercise their options, the practical effect of the agreement is the same as a buy and sell agreement. In this instance, eligibility for business relief is retained.
The wording of these agreements is obviously crucial. HMRC gives specific reference to a double option agreement entered into under which the surviving partners have an option to buy (call option) and the beneficiary has an option to sell (a put option), such options to be exercised within a stated period after a partners death.
If the option periods for the purchase and the sale are not identical (e.g. the option to buy for three months and the option to sell for six months from the date of death) this does not affect how HMRC views the agreement.
In Spiro v Glencrown (1991) the decision provided authority for an option to be a contract for sale, which resulted in no business relief being available. Early in 1996 HRMC (then the Capital Taxes Office) confirmed there had been no change in its opinion regarding Statement of Practice SP12/80 and the case wouldn’t be cited as authority for an option constituting a binding contract for sale.
More recently the 2000 case Griffin v Citibank Investments provides a much stronger argument that an identical terms buy and sell option together do not constitute a single bilateral contract. This did not concern an arrangement for a share purchase between partners but it did involve 2 identical options and is of particular relevance for this reason.
In December 1994 Citibank Investments Ltd sought an investment that would generate funds in the form of capital gains rather than as income liable to corporation tax. It purchased 2 FTSE linked options on terms that all transactions entered into on reliance of the purchase agreement formed a single transaction. Corporation tax was then assessed for 1994, 1995 and 1996 on the gains arising from the two option contracts.
On appeal to the Special Commissioners, Citibank Investments Ltd contended successfully that the gains arising from the options fell to be treated as capital gains rather than as profits or gains chargeable to tax under Schedule D. HRMC appealed the decision but conceded that each of the two options, if taken separately would be a qualifying option within the meaning of section 128 ICTA 1988 and accordingly any gains would have been exempted from a charge to tax.
However, if the two options fell to be treated as one composite transaction by the operation of the Ramsay principle (in essence the court should not confine itself to the method of assessing the tax consequences of each individual transaction in a composite transaction but instead should look at the composite result and consequences) as was the Revenues contention, that would fail to satisfy the statutory definition of a qualifying option within the meaning of section 128.
As all the above indicates, setting up these agreements is best done using advice from an experienced IHT and business adviser.
Please call us if you own a business with a person who is not your spouse for help in the passing of business shares.
Inheritance Tax Planning for Cohabiting Couples
In a recent YouGov survey about cohabitees legal rights, 35% of cohabitees either did not know what legal rights they had or believed that once they had lived together for a year they automatically had the same rights as married couple. In fact, if a relationship breaks down, the court cannot reallocate resources between them on the grounds of fairness and neither party is able to claim maintenance from the other for their own benefit.
In the survey, only 33% of the couples said that they had taken advice about their different options. Consequently 40% of the couples had bought their home in the name of one partner, 13% were tenants in common and 41% bought as joint tenants. It may be a surprise to learn that joint tenants are presumed to be equal owners regardless of the actual contribution they made to the purchase. Only around 50% of the cohabitees in our survey contributed equally to the deposit and a mere 42% paid equally towards the monthly mortgage repayments. It would be wise for the remaining couples to buy as tenants in common and make a declaration of trust stating clearly each party’s share.
If a property is purchased in one name a court is unlikely to recognise another individuals claim upon it. Likewise, if the ‘Bank of Mum and Dad’ are involved in the purchase of a property it should be made absolutely clear whether they are buying a share of the property, offering a loan or making a gift. A formal loan agreement is a practical option; the purchase should be in joint names, as tenants in common supported by a declaration of trust. It is recommended that parents involved take advice on the tax and practical implications of purchasing a property.
Property owned by joint tenants passes automatically to the survivor regardless of any of the deceased’s bequests. If either party wishes to leave their share in the property to a third party, the property should be held as tenants in common and a specific will made.
The survey highlighted that a surprising 44% of the cohabiting couples had not made a will, so their assets will pass under intestacy rules which do not benefit unmarried partners at all. Challenging this in a court is expensive and the outcome uncertain for a surviving partner, and making a Will is the only way to provide clarity and peace of mind.
Where surveyed cohabiting couples had children, 73% of them couldn’t determine what support their partner should give them on separation. In fact, both parents are expected to pay to maintain their children until they complete their education. The Child Maintenance Service assesses how much should be paid to the parent with the greatest caring responsibility and will enforce payment.
The court cannot make a child maintenance order unless the paying parents’ gross weekly income exceeds £3,000. If necessary, applications can be made for a lump sum, eg for a car, and as a one-off for the transfer or purchase of a property. The property will be reverted to the paying parent once the child has finished full time education.
In the survey 76% of those cohabiting couples surveyed had never heard of cohabitation agreements, and only 10% had one in place. These contracts cover the ownership of the finances and property and make financial provision for the children.
Despite many calls for a statutory framework for the fair distribution of cohabitees’ property in a relationship breakdown, in the short term law reform is unlikely. Evidently numerous cohabitees are simply unaware of the potential circumstances that will arise if their relationship breaks down or one partner dies. Anyone already cohabiting or contemplating it is strongly advised to take as much advice as possible in order to circumvent stressful disputes and avoid potentially distressing situations. Let us help you. Call now for a free 30 minute consultation 01582 447069.