Inheritance tax planning can feel overwhelming, but with careful planning it is possible to plan to significantly reduce your family’s tax burden whilst ensuring your wealth passes efficiently to the next generation. One particularly effective approach is using growth shares.
If you’re a business owner looking to minimise inheritance tax (IHT) whilst maintaining control of your company, growth shares could be exactly what you need. Let me walk you through how they work, why they’re so effective, and crucially, why getting the valuation right is absolutely essential.
What are Growth Shares?
Growth shares are a special class of shares designed with a built-in threshold mechanism. Unlike ordinary shares, they only begin to accrue value once your company’s worth exceeds a predetermined hurdle amount. Think of them as shares that “switch on” only when your business reaches a certain valuation milestone.
Here’s how they work in practice, when you create growth shares, you set a hurdle value (often the current value of your company, or slightly above it). The growth shares then entitle their holders to participate in any increase in the company’s value above this threshold. Crucially, they have no entitlement to the value below the hurdle – that remains with the existing ordinary shareholders.
This structure means you can effectively “ring-fence” the current value of your business for yourself whilst gifting away the rights to future growth. You maintain control through your ordinary shares, but any future appreciation flows to the growth shareholders – typically your family members.
The beauty of this arrangement is that it allows you to make a gift of potentially substantial future value whilst the growth shares may currently have a relatively modest value for tax purposes.
Why Growth Shares are so effective for IHT planning
The beauty of growth shares lies in their ability to transfer future capital growth out of your estate for inheritance tax purposes.
You can gift these growth shares to your family members (or place them in trust for their benefit), which means any future increase in your company’s value above the hurdle threshold passes directly to them. This future growth is then excluded from your estate when calculating inheritance tax – potentially saving your family hundreds of thousands of pounds.
A practical example
Imagine your company is currently valued at £1 million. You decide to gift growth shares to your children with a hurdle threshold set at £1.2 million. Fast-forward five years, and your company has grown to be worth £1.5 million.
The £300,000 increase (from £1.2m to £1.5m) belongs entirely to your children through their growth shares and won’t form part of your estate for inheritance tax purposes. At the current 40% IHT rate, this could save your family £120,000 in tax.
Why the right valuation is critical
Whilst growth shares are tremendously effective, there’s a crucial caveat – getting the valuation right is paramount.
When you transfer growth shares, you’re making a disposal at market value for both inheritance tax and capital gains tax purposes. An incorrect valuation can lead to unexpected and potentially substantial tax charges.
Historically, HMRC accepted that growth shares had minimal or no market value when the company’s current worth was below the hurdle threshold. However, this landscape changed significantly several years ago. Now, HMRC now takes a more sophisticated view, valuing growth shares based on expected future proceeds rather than current position relative to the hurdle. Their reasoning is quite logical, you wouldn’t transfer valuable rights to future growth to an unconnected party for nothing, so why should transfers to family members be treated differently?
This shift in HMRC’s approach means that growth shares now typically have a meaningful value that must be properly calculated and defended. The various methodologies can provide HMRC with an opportunity to challenge “fragile” valuations.
Getting the right advice when it comes to valuation
Growth shares remain a mainstream, well-established inheritance tax planning tool that’s successfully used by thousands of business owners every year.
HMRC’s evolved approach doesn’t mean they’re trying to stop growth share schemes – they’re simply ensuring that valuations reflect economic reality. This is actually quite reasonable when you think about it. They want to make sure that if there’s genuine value being transferred, it’s properly recognised for tax purposes.
The key points to remember are:
Professional valuations – Experienced valuers understand HMRC’s current approach and can provide robust valuations that account for their methodology. This isn’t uncharted territory.
HMRC’s challenges are typically focused on unrealistic valuations – If your valuation is professionally prepared using recognised methodologies and reasonable assumptions, it’s far less likely to face scrutiny.
The tax savings still significantly outweigh the costs – Even with the need for professional valuation advice, the potential inheritance tax savings make growth shares extremely cost-effective for most business owners.
Timing flexibility exists – You can often structure growth share arrangements when market conditions and your company’s prospects support a more favourable valuation.
Moving forward: getting it right
Growth shares remain one of the most effective inheritance tax mitigation strategies available to business owners. However, success depends entirely on proper implementation and, crucially, obtaining a technically sound valuation that can withstand HMRC scrutiny.
The stakes are simply too high to take shortcuts. An incorrectly valued growth share scheme could expose you to significant unexpected tax charges, completely undermining the benefits you’re trying to achieve.
I would always recommend seeking professional advice from specialists who understand both the technical intricacies of growth share structures and the current valuation landscape. The investment in proper professional guidance will be far outweighed by the tax savings and peace of mind you’ll achieve.
If you’d like to discuss whether growth shares might be suitable for your circumstances, or if you have questions about inheritance tax planning more generally, please do get in touch. Our team is here to help you navigate these complex but crucial decisions for your family’s financial future.
