To have and to hold (over)
6th February 2026
Posted in Articles by Forbes Dawson
With BPR planning now reaching frenzied levels before 5 April 2026, even with the increase in value of the 100% BPR allowance (from £1m to £2.5m per person), we have prepared numerous calculations on the tax impact of setting up trusts with qualifying BPR shares. A number of these clients plan to sell their companies after a few years and are happy that a significant portion of their proceeds will go into trusts for family members.
Surprisingly, sometimes these calculations give rise to a worse IHT position for a short period of time (usually up to three or four years), than the client simply retaining and selling all the shares. This is due to the methodology around how gifts are calculated. The diminution in value basis of calculation means that the gifts that remain potentially chargeable for seven years are higher in value than the pro-rata market value of the shares given away. When the settlor’s retained shares are correspondingly devalued due to minority discounts this is not an issue, but when the company is sold and the proceeds are split pro-rata, this causes the discrepancy. Also, if no planning had been undertaken, the total CGT payable on the sale would reduce the client’s estate.
This gives rise to some unexpected results, particularly where there has not been much growth in the company after the shares have been settled in trust. Significant tax benefits arise after this period though, due to greater taper relief on the IHT payable, so we are certainly not advocating doing nothing. The benefit of getting millions of pounds of value into a trust with the potential of no upfront tax liability should not be dismissed. Nevertheless, this quandary needs to be pointed out to the client, as insurance may be an option for this short period of time. Fortunately, there is also a little-known relief that applies to soften the blow…
Example
Consider Mr Phoenix, who owns 100% of the shares in his successful trading company, Ashes to Ashes Ltd, worth £40m. He intends to sell the company in 2028. Ultimately, he wants his children to benefit from 50% of the proceeds and so he transfers 50% of shares into trust before 6 April 2026 when BPR is unlimited. Based on a diminution in value calculation, the value of his gift is treated as £24m (in other words the value of shares that he holds has reduced from £40m to £16m and it attracts 100% BPR). He elects to holdover the capital gain, as he has very little base cost, having set the company up with £100 many years ago. He and the trustees then sell the company for £42m in March 2028.
Unfortunately, Mr Phoenix dies in December 2028 on a helicopter trip (a new jet-set toy bought with his newfound wealth) and sadly there was no phoenix rising from the ashes scenario – he was stone-dead! As the shares are no longer held by the trustees on his death, BPR will be clawed back and 40% IHT will be payable by the trustees on the failed chargeable transfer, resulting in £9.6m of IHT (assume that the nil rate band has been used against an earlier PET now chargeable). No taper relief would be available as the gift into trust would only have been made two and a half years ago.
The trustees would also need to pay capital gains tax on their capital gain of £21m (50% of the sale proceeds of £42m, due to no base cost), leaving £5.04m payable on 31 January 2029. Without any reliefs, the trustees would therefore suffer total tax of £14.64m.
Fortunately, s260(7) TCGA 1992 allows the trustees to take a deduction against the capital gain of the lower of:
1. The IHT payable on the chargeable transfer (£9.6m), or
2. The capital gain arising on the trustees’ disposal (£21m)
This cannot create a capital loss.
This relief therefore effectively treats the IHT as a cost of sale. It is not a tax credit against the CGT. Therefore, in this example, the capital gain will be reduced to £11.4,m (£21m – £9.6m) which when charged at 24%, results in £2.736m of capital gains tax – a reduction of £2.304m. This effectively provides tax relief on the value of the gift (£24m) at a rate of 9.6% (40% x 24%).
The total tax payable by the trustees will therefore reduce to £12.336m (£9.6m IHT plus £2.736m CGT), leaving the trustees with £8.664m net. Together with the 24% CGT payable (ignoring BADR) on his personal proceeds of £21m and 40% IHT on the remainder, this leaves his free estate with £9.576m. The overall net proceeds for the family are therefore £18.24m. If he had done nothing, his family would have inherited £19.152m (£42m x 76% x 60%).
While the family still ends up £912,000 worse off, without the relief, this would increase to £3.2m!
Forbes Dawson view
This is a lesser-known relief but a very valuable one and so should not be forgotten. There is also a similar relief for ‘failed PETS’ in cases where a business asset holdover relief claim has been made.
Everyone knows when making a gift that they are taking a punt that they will survive for seven years. The rewards are large if the gift is successful, but it pays to know the potential downsides, so it can be planned for with insurance, or at the very least so that it does not come as a shock to the family. Fortunately, in this case, taper relief would have reduced the IHT after four years such that an IHT savings would have been achieved from that point onwards.
