Autumn freeze

  • Author : Lee Blackshaw
  • Date : November-December 2009
ABOUT THE AUTHOR: Lee Blackshaw TEP is a Senior Tax Manager at PwC in the Entrepreneurs and Private Companies tax team

In the past year or so we have seen significant falls in the value of land and buildings. This has led some property investment clients to look at freezing that element of their estates for inheritance tax purposes.

Shares in property investment companies rarely qualify for inheritance tax business property relief. Clients holding such investments therefore look for other routes to minimise their inheritance tax liability.

One result of this is that we may well see a ‘freezing’ autumn. What I mean by that is clients fixing the current low value in their estates and passing the future potential growth in value to future generations. To add further protection they may wish to hold that growth in trust.

Value freezing in outline

If the client holds a UK property investment company a new class of growth shares is issued, by way of a bonus issue. These are only entitled to dividends and entitlements on winding-up once the current value of the company has been distributed to the holders of the existing class of shares.

The rights attaching to the existing shares are altered to restrict their dividends and entitlements on winding-up to a total amount equal to the current value of the company and so freeze their value.

The new growth shares initially should be worth very little, and might possibly have nil value, but may grow significantly in value in the coming years if the property market recovers. The new shares could be given to adult children, but where the future growth may be substantial, a trust (or trusts) may be a more suitable recipient.

An example

Mr Property holds 100 per cent of a UK company that holds various residential investment properties. The value of the company is currently GBP3 million.

A new class of ‘B’ shares is issued to Mr Property. The articles of the company are amended so that the ‘B’ shares are entitled to dividends and capital on winding up only to the extent that the existing ‘A’ shares have received GBP3 million by way of dividend or capital. The ‘B’ shares are initially worthless or worth very little.

Mr Property makes a gift of the ‘B’ shares to a discretionary trust for his adult children and future generations.

Mr Property dies in five years’ time when the company is worth GBP4 million. The ‘A’ shares have paid total dividends of GBP500,000 over the five years. Therefore the ‘A’ shares are then worth GBP2.5 million and the ‘B’ shares are worth GBP1.5 million.

The ‘B’ shares have captured the future growth of GBP1.5 million and the ‘A’ shares have been frozen at GBP3 million (less dividends received).

The inheritance tax saving is 40 per cent of the GBP1.5 million, being GBP600,000.

Capital gains tax

The bonus issue of new shares and reorganisation of the share capital will fall within the reconstruction rules contained in section 127 Taxation of Chargeable Gains Act 1992, with the result that there is no disposal for capital gains tax purposes.

The gift of the growth shares is a disposal at market value. However, the deemed proceeds are nil or very small.

If the shares are transferred into trust, capital gains tax holdover relief will be available as long as the settlor, spouse, civil partner and minor children of the settlor are excluded from benefit.

Inheritance tax

The reconstruction itself will not be a chargeable event for inheritance tax purposes, but the gift of shares will be a potentially exempt transfer, if made to the children, or a chargeable lifetime transfer, if made to most types of trust.

If the client has a full nil rate band available then as long as it is clear that the value is well within the nil rate band it may not need a detailed valuation negotiation with HMRC shares valuation.

If the client has made potentially exempt transfers, and dies within seven years, these will become chargeable transfers and may exhaust the nil-rate band, which will impact on the inheritance tax position of the new trust. It may be appropriate to consider short-term life insurance cover depending on the specific circumstances.


It is wise to involve a share valuation specialist both to value the company and confirm the initial low or nil value of the growth shares. Sometimes it is wise to err on the side of caution. For example, if it is thought that the company is worth GBP2 million, perhaps set the freezer hurdle at GBP2.1 million.

How many trusts?

One trust may be suitable in many client situations, but there can be an advantage in creating several pilot trusts on different days with, say, GBP100, followed by a gift of the growth shares to all the trusts on one later day. This follows the principle in the Rysaffe case (Rysaffe Trustee Company (CI) Ltd v CIR [2003] STC 536), where it is possible to ‘steal’ a nil-rate band for each trust and so reduce the future ten yearly charges to inheritance tax.

The Rysaffe case involved five trusts. I have seen ten trusts used on a few occasions and clients often ask for more. It is a balance between capturing several nil-rate bands and the administrative costs.

I prefer five. (I view multiple trusts in the same way as being responsible for children at a party – five is manageable, but ten or more would cause me to panic!)

Company articles

Typical points that I see in the solicitor’s documentation for the client include:

  • When and if voting rights should accrue to the ‘B’ shares
  • Impact on drag and tag along rights
  • How to define the current value
  • Pre-emption rights
Tax risk

The main risk is implementation. If you follow the Rysaffe route then it is important that the trusts are clearly separate by being created and signed on different days (and perhaps having different beneficiaries and perpetuity periods). Once created it is important that the separate trusts are run properly with, for example:

  • annual accounts prepared (even if there are no transactions)
  • at least one annual trustees’ meeting for each trust (including minutes)
  • an annual review of the trust, the beneficiaries and the suitability of retaining the growth shares.
Practical risks

It is certainly worth challenging the client so that they are aware that their entitlement from the shares retained is clearly capped – what if they have substantial dividends over the years equal to the current value of the company and spend the cash, so that their source of wealth disappears? Are they comfortable with that?

A more aggressive route

A variant that I occasionally see is where the new ‘B’ growth shares gradually accrue substantial rights and value over time, so that those shares capture not only future growth but also the original frozen value of the ‘A’ shares. In effect, the whole value shifts into the new shares over several years. Section 98 Inheritance Tax Act 1984 attempts to stop this type of planning and may do so, although I have seen views to the contrary.

Other variants

Variants of the planning can include the use of preference shares, having a hurdle higher than the current value and consideration of what dividend rights the two share classes should accrue over time. These make the planning flexible and enables a bespoke plan to be put together to fit specific client circumstances.


The trusts can be reported to HMRC on the form 41G (Trust). There is no statutory requirement to do so until taxable income or gains arise in the trust, which may be several years away. I like to report the trusts straight away.

For inheritance tax purposes the cash gifts to any pilot trusts will be below the reporting limit. The shares are also of low value but, as they are not quoted shares, they do not fall within the reporting limit exemption so forms IHT100 and IHT100a will be required.

The disposal of shares will need to be reported on the settlor’s tax return, perhaps with a suitably worded disclosure in the white space and a form IR295 holdover election under section 260 Taxation of Chargeable Gains Act 1992. It is worth electing under SP8/92 on that form to defer the valuation of the shares for capital gains tax purposes.

Whenever company shares are issued or transferred it is always worth thinking ‘are there any employment related securities issues?’ as the legislation in Part 7, Income Tax (Earnings & Pensions) Act 2003 is very wide ranging. In the circumstances of this planning it is unlikely that that reporting or an election is required, but there could be if the shares are transferred by reason of employment rather than for family reasons.


This is a useful planning opportunity, taking advantage of current low values and passing future wealth into trust for future generations. We may therefore enjoy some freezing activity to keep us warm and busy in the autumn.


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