Family Companies – It’s Never Too Soon to Start Estate Planning

Estate planning is essential when there is a family business to prevent tax problems in the untimely death of a shareholder as this following High Court case demonstrates.

The founder of the company was diagnosed with cancer and was terminally ill, there were concerns that his loan as a director of £490,00 would have to be repaid when he died. To overcome this, they gave him 490,000 shares, which were worth £1 each so that shares replaced the debt.

The problem with that was when he died he was still the majority shareholder and his interests increased to around £15 million having an impact on tax liabilities which were also increased. Inheritance Tax and Capital Gains Tax particularly affected his estate.

To remedy the situation, the company sought to dismiss the transaction because it had breached the rules and the directors supported this action.

The Court granted the request, accepting that the decision was rushed and ill-considered. They had not considered the outcome of the decision or the consequences of giving away more shares, which gave the founder more of the company and therefore less for the other shareholders. As they had not even considered Estate planning prior to this they had not even considered the tax implications also.

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