Don’t forget about the inheritance tax disadvantages of personal holding companies
8th August 2025
Posted in Articles, Business Property Relief, IHT, Inheritance Tax, Trusts and Estates by Andrew Marr
Although Business Property Relief (BPR) is being ‘watered down’ from 6 April 2026 it is still an important relief from inheritance tax (IHT). Broadly speaking, from 6 April 2026, where an individual dies holding shares in a trading company, their estate will benefit from full BPR on values up to £1m and 50% BPR on all values thereafter (before 6 April 2026 there is unlimited full relief). This is an important relief to bear in mind when considering shareholding structures and, for obvious reasons, it is more important the older the shareholder is.
‘Personal holding companies’ are often an attractive structure when shareholders want to ringfence ‘their’ share of excess assets from the trading company in which they are shareholders.
Example
Roger, Steve and Tony own shares in a manufacturing company. They each hold 33 A shares, 33 B shares and 33 C shares respectively. The company makes profits of £3m per annum and although the shareholders would like to ‘de-risk’ these funds from the trading operations they do not want to do this by taking dividends and paying 39.35% income tax (or put another way, they want to keep the funds in a corporate structure). They achieve this by each respectively incorporating Roger Newco, Steve Newco and Tony Newco and then each Newco respectively acquires A shares, B shares and C shares by issuing shares to the shareholders. The end result is that Roger holds shares in Roger Newco which holds 33 A shares, Steve holds shares in Steve Newco which holds 33 B shares and Tony holds shares in Tony Newco which holds 33 C shares. After receiving dividends from the trading company, they then each operate investment businesses in their holding companies according to their different risk profiles.
One concern in the above restructuring is getting HMRC to agree that the insertion of personal holding companies is a ‘bona fide commercial reason’, although anecdotally they generally seem to be more accepting of this in recent years. Importantly, however, there have been cases of shareholders going into this without appreciating the fact that their shares will no longer attract BPR. Although BPR can apply to a holding company of a trading group, the above companies do not meet the definition of being holding companies because they do not hold more than 50% of the shares.
Forbes Dawson view
Depending on the circumstances, this oversight can have quite serious implications. Imagine that Steve (in the above example) dies in 2028 when his shares are worth £6m. The restructuring would have cost his estate £1.4m of IHT (40% of £1m and 20% of £5m). This does assume that non-trading (or investment) business activity does not end up exceeding 50% because then all BPR would be lost (although there is other planning such as a demerger which could deal with this).
One alternative solution could have been to insert a single holding company with different share classes linked to a defined pool of ‘Roger assets’, ‘Steve assets’ and ‘Tony assets’. Although this does not completely mirror the commercial position in the example (e.g. what if Roger does something so bad that Steve and Tony’s investments are put in jeopardy?) with some sensible management it could be made to have the same practical outcome. Anyway, the main message is that shareholders should not insert personal holding companies without appreciating the IHT disadvantages.
