Freezer and growth shares are a crucial part of family investment companies. They help lock in current values for older generations and allow younger family members to benefit from future growth. This guide will explain how they work, the tax benefits and strategic implementation for wealth preservation and succession planning and how freezer and growth shares in a family investment company can add to overall family wealth strategy.

Key Points

• Freezer shares preserve existing value for older generations, growth shares accumulate wealth through future growth for younger family members.
• Using freezer and growth shares can give significant tax benefits including inheritance tax relief and capital gains tax exemptions, tax efficient wealth transfer.
• Proper structuring including share valuation and governance is key to successful implementation of freezer and growth shares in a family investment company.

Freezer Shares and Growth Shares in Family Investment Companies

In family investment companies freezer shares and growth shares are key wealth management and succession planning tools. Freezer shares lock in the current value of existing assets, so they don’t grow and the value is preserved for the older generation.

Growth shares allow younger family members to benefit from future growth in company assets, wealth accumulation over time. Using these two types of shares can reduce inheritance tax and preserve family wealth.

Using freezer and growth shares allows family investment companies to balance generational interests, stability and future prosperity.

Freezer Shares: Preserving Existing Value

Freezer shares are the foundation for preserving existing equity value in a family investment company. Their purpose is to maintain the current value of assets for the older generation, so they get a certain amount at exit. This mechanism freezes the value of existing assets so they don’t grow.

Freezer shares allows current shareholders to lock in their equity value while transferring growth to younger generations. This gives stability and value preservation, so older family members can control during the wealth transfer.

Plus freezer shares provides a structured way to manage too much equity in a family business, so existing equity is preserved and new shares capture future growth. This means value is preserved and the whole wealth transfer process is more predictable and manageable.

Growth Shares: Capturing Future Growth

Growth shares are key to future capital appreciation in a family investment company. These shares are designed to capture the company’s future growth, so future appreciation is prioritised and younger family members can build wealth over time. Growth shares typically only start to accrue value when the company exceeds a certain threshold, so younger generations are aligned with the business’s success.

Strategic allocation of growth shares can manage control effectively, so too much equity isn’t transferred to younger generations too early. Current shareholders can retain decision making power while giving the next generation opportunities to participate in capital growth.

And growth shares can be structured to qualify for business asset gift relief which can reduce capital gains tax liabilities. Gifting growth shares to younger family members not only captures future growth but also gets them actively involved in the business, so they feel ownership and responsibility.

Tax implications of Freezer Shares and Growth Shares

Tax is key when structuring freezer and growth shares in a family investment company. These shares offer inheritance tax relief and capital gains tax exemptions which can reduce the tax burden on beneficiaries. Freezer shares allows older shareholders to control and lock in asset value for inheritance tax purposes, growth shares allows younger members to benefit from future business success.

Using these shares can be a tax efficient way to transfer wealth and succession planning, they are a valuable tool for family investment companies. You need to consider the tax implications, including inheritance tax relief, capital gains tax and income tax when choosing the share structure.

Inheritance Tax

Freezer shares offers inheritance tax benefits by capping the value of existing assets so reducing potential tax liabilities. Freezer shares by fixing the value for inheritance tax purposes can prevent deemed gifts that would otherwise increase the tax burden. This mechanism allows families to lock in the current value of their assets while getting 100% inheritance tax relief on future growth of those assets.

Freezer shares can reduce the overall inheritance tax burden, preserve family wealth and transfer to the next generation. This is particularly useful for high net worth individuals looking to optimise their tax and succession planning.

Capital Gains Tax

Capital gains tax is another consideration when structuring freezer and growth shares. When growth shares are sold by freezer shareholders a capital gains tax liability is triggered on the future growth of those shares. But gifting shares can avoid capital gains tax if the gain is held over during the transfer.

Be aware of HMRC’s views on valuing growth shares as they are very reluctant to accept zero value, which can complicate capital gains tax assessments. Proper planning of growth share structure helps families manage capital gains tax liabilities more effectively and transfer wealth tax efficiently.

Income Tax Efficiency

Using freezer and growth shares can also bring income tax efficiency. For example, dividend income received by a family investment company is not subject to Corporation Tax which can save a lot of tax. And dividend payments between companies are often tax free which adds to the tax efficiency of these share structures.

Freezer shares can have a preferred dividend coupon rate based on the frozen value. This means shareholders get a fixed return. This can give older family members a guaranteed income in retirement, while growth shares can have little to no initial value to minimise tax implications.

Strategic gifting of growth shares helps families avoid capital gains tax and overall tax planning.

Freezer Shares and Growth Shares Structure

Structuring freezer and growth shares in a family investment company requires planning and thought. In many cases A shares are used to lock in the existing equity value, while B shares are used to capture future growth for the next generation. This dual share structure can transfer wealth tax efficiently and can exempt dividend income from corporation tax.

The process involves valuing the shares, updating the articles of association and issuing shares to family members. Each step is important to ensure the share structure aligns with the family’s goals and legal requirements.

Valuing Shares and Share Classes

Valuing shares and having different share classes is important in a family investment company. Two classes of shares are usually created: A shares which represents the current value and locks in the existing equity for current shareholders and B shares which captures the company’s future growth.

This way the existing equity is locked in with A shares and B shares are used for future growth. Proper valuation of the company is important to set up freezer shares and achieve the right balance between preserving current value and future capital growth.

Articles of Association Update

Updating the articles of association is a necessary step to reflect the new share structure in a family investment company. This legal process separates existing and future share values so the company is compliant and clear in its governance.

Issuing Shares to Family Members

Issuing shares to family members is a strategic process of distributing B shares to capture growth and retaining A shares to reflect the company’s current value. This way younger family members get the benefit of future company growth and current shareholders maintain control.

Strategies like right of first refusal can help maintain family control when issuing shares. By planning the issuance of shares carefully family investment companies can balance control and growth opportunities and transfer wealth and management smoothly.

Legal and Governance

Setting up freezer and growth shares in a family investment company has legal and governance implications. Compliance and management of share structure is important to ensure the shares work as intended and align with the family’s goals. Governance is important to ensure the rules and regulations are followed and the company is run properly.

Addressing these legal and governance aspects helps family investment companies create a solid framework for wealth preservation and future growth and minimises disputes and succession planning.

Shareholder Agreements

Shareholder agreements are important to align expectations among family members and prevent disputes. These agreements define the roles, responsibilities and rights of each shareholder and provide a framework for the family investment company.

In addition to managing expectations shareholder agreements prevent conflicts by outlining the terms of share ownership and transfer. So all family members are on the same page and the business is harmonious.

Voting Rights and Control

Voting rights is important in family investment companies to maintain control during governance transitions. Structuring shares without voting rights helps to preserve control for current directors or shareholders which is important for governance stability.

Introducing a class of shares with minimal or no voting rights allows existing shareholders to retain decision making power while giving growth opportunities to younger generation. This balance ensures good governance and succession planning and all family members are aligned.

Example: Freezer and Growth Shares in Action

A practical example shows how freezer and growth shares were implemented in a family investment company and trading company. In this case freezer shares were used to retain rights to dividends and capital up to current value so the older generation’s assets were preserved. B shares were issued to younger family members so they can benefit from future company growth.

This way the next generation can be involved in the business actively and feel ownership and responsibility while the older generation maintains control over existing assets. The result is a balanced and effective wealth preservation and future growth strategy.

Freezer Shares or Growth Shares

Choosing between freezer shares and growth shares depends on older generation’s income needs and their desire to be involved in the business. Setting up family investment companies should be part of overall inheritance and succession planning.

By issuing growth shares to family members families can transfer wealth and current shareholders maintain control. Freezer and growth shares worked well in the case study to balance value retention and future growth.

Conclusion

In short freezer shares and growth shares are great tools for wealth preservation and succession planning in family investment companies. By understanding how they work, the tax implications and the structuring options families can make informed decisions for current and future generations.

These shares provide a tax efficient way to manage inheritance tax, capital gains tax and income tax. By planning and implementing these shares family investment companies can have a balanced and bright future.

Frequently Asked Questions

What are freezer shares and why are they important?

Freezer shares are a financial mechanism that preserves the equity value for older generation during an exit event so they get a predetermined amount. They are important to preserve existing asset values and let future growth benefit younger generation.

How do growth shares benefit younger family members?

Growth shares benefit younger family members by allowing them to build wealth from future growth of company assets while being aligned with the business success. This encourages them to contribute to the business over time.

What are the tax benefits of freezer and growth shares?

Using freezer and growth shares can be tax efficient through inheritance tax relief and capital gains tax exemptions. Freezer shares stabilise asset values for tax purposes while growth shares may be eligible for business asset gift relief and therefore minimise immediate capital gains tax liabilities.

How can freezer and growth shares be structured in a family investment company?

Freezer and growth shares can be structured in a family investment company by creating different share classes e.g. A shares for current value and B shares for future growth. This requires share valuation, update of articles of association and careful issuance of shares to family members to balance control and growth opportunities.

What are the legal and governance implications of freezer and growth shares?

When using freezer and growth shares you need to comply with the law, manage share structures and have shareholder agreements to avoid conflicts. Structuring shares without votes can help to maintain control for existing directors or shareholders.