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Succession of family businesses: freezer shares vs growth shares


This is the third article in our series examining the factors that go into succession decisions for family firms and the different types of succession strategies that we tend to see used. The series complements our search for the oldest family-owned businesses across Essex.

You can read the previous articles in our series via the links below

In our final article we examine growth shares and freezer shares. Use of both options in trading businesses has grown in recent years, and they are becoming particularly popular in family business scenarios.

Are freezer shares or growth shares suitable for family-owned businesses?

The broad premise of these share structures is that the older generation seek to protect all or most of their existing equity value. Freezer shares are entitled to a preferred amount of value on an exit event/winding up, whereas the growth shares are entitled to the future capital growth of the company.

In some cases the freezer shares will be structured with a preferred dividend coupon rate on their frozen value. This will depend on the extent to which the older generation feel they need a guaranteed income entitlement during their retirement.

Likewise, voting rights can be thought about in terms of whether the older generation are willing for the growth shares passing to the younger generation to carry a collective voting control or not.

Growth share planning, rather than a buyout of the older generation or a straight gifting of their shares, might be a particularly attractive option in certain circumstances. For example, where there is a desire by the older generation not to pass down too much equity too early, or where the older generation do not currently want or need any significant equity from the business yet.

Alternatively they may want to retain voting control and stay actively involved in the business, or perhaps the business cannot easily raise a large capital payment for their equity. In these circumstances, the solution is to give the older generation a right to an income on those shares.

These structure can also be Inheritance Tax (IHT) driven, as the freezer shares can potentially qualify for 100% relief from IHT, whereas cash or a loan notes from a buyout would generally not.

HMRC is getting more proactive in querying the values attaching to growth shares, and are reluctant to accept (especially for substantial trading businesses) a £nil or negligible value attaching to them.

However, in a family business scenario this is typically less of a concern if the older generation are gifting the growth shares to the younger family members. Any capital gain should qualify for business asset gift (aka holdover) relief, the gift should qualify for IHT relief by virtue of Business Property Relief, and the ‘primary due to family or personal relationship’ exemption should (normally) shelter an income tax charge on the recipient.

To discuss your particular circumstances in more detail and evaluate whether freezer shares or growth shares are suitable for your family-owned businesses, please contact James Boustead via our online enquiry form .

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