Many know what to do when inheriting money or property. However, that might not be the case when inheriting company shares, particularly from the perspective of navigating tax implications.
This article explores some of the key considerations when inheriting company shares — in public and private companies.
Are the shares ‘theirs’?
An individual will need to ensure that the inherited shares have been properly transferred and are registered in their name.
Shares in a private company are generally not freely transferable and are often subject to restrictions as set out in the company’s articles of association, or a shareholders’ agreement (if one exists).
There will normally be fewer restrictions on a transfer of shares in a public company — though care will be needed to ensure regulatory steps are complied with, especially if deemed to be part of a “concert party” for the purposes of the Takeover Code.
Most private companies incorporated after October 1 2009 adopt the “model articles”, under which beneficiaries of shares inherited under a will (or intestacy rules) are recognised as having title to those shares. However, they do not have the right to vote on company matters until they become the registered holder of the shares.
Similarly, until registered as shareholder, any dividends declared will be payable to the executors of the deceased — whether the dividend is ultimately owed to the donor’s estate, or the beneficiary, depends on the provisions of the will.
In the case of a company with a sole shareholder/sole director, the executors will only be able to take on the powers and responsibilities of a director, and be formally recognised as a shareholder, where there is specific provision in the articles. Otherwise, a court application will be needed to enable the executors (or beneficiaries) to be so registered.
Planning options
Once it has been established that the shares are duly registered, the individual will need to consider the impact of the value of the shares being comprised in their own estate from an inheritance tax perspective, especially for a spouse. It might be better for others to receive the shares instead and a deed of variation can be entered into within two years of death to redirect the inheritance elsewhere.
The individual should consider whether any IHT planning can be put in place in lifetime or on death through their will. The liability for IHT on shares depends on whether the shares are held in a public quoted company or a private limited company.
Business relief — previously known as business property relief — applies to certain types of shares (as well as certain business assets) and was introduced to allow family-owned businesses to continue to trade after a death, without their inheritor having to sell the shares (or business assets) to fund an IHT liability.
