Passing shares to the next generation is only the start of family-business succession planning. The more difficult question is what happens to those shares afterwards — on death, divorce, a shareholder leaving the business or ownership eventually passing to grandchildren.
Keeping shares within the family
Robust articles can restrict transfers outside the family and require a shareholder to offer shares to approved family members or existing shareholders first. The documents can also define permitted transfers to children, family trusts or other agreed structures.
These rules need to remain workable as ownership spreads. A definition of “family” that works for the founders may be much less clear once there are several branches and generations.
What happens on death?
A deceased shareholder’s shares normally form part of their estate, but the company documents may control what happens next. The remaining shareholders may want to retain family ownership while the deceased’s family may need to realise the value of the shares.
Shareholder protection can provide a mechanism for the continuing shareholders to buy the shares, potentially supported by life insurance. However, the tax wording matters: a binding buy-and-sell agreement existing before death can prevent Business Relief from applying. Properly drafted single or cross-options are often used instead so there is no automatic obligation on both sides before death.
The Will and the company documents must agree
A Will may leave shares to a daughter while the articles require them to be offered to other shareholders. Neither document is necessarily wrong, but the plan is inconsistent. Wills, articles, shareholder agreements, life insurance and any trusts should therefore be reviewed together.
Leavers and valuation
Family shareholders may retire, stop working in the business or simply want to realise their investment. Leaver provisions can determine when shares must be offered for sale, who can buy them and how the price is calculated.
Valuation should also be agreed before there is a dispute. A 20% private company holding is not necessarily worth exactly 20% of the whole company because control, share rights and minority discounts can matter. Documents can specify the valuation basis, date, independent valuer and dispute process.
Divorce and personal circumstances
Transfer restrictions can make it harder for shares themselves to pass outside the family on divorce, although they do not make the underlying value disappear from matrimonial proceedings. For substantial family wealth, company provisions may therefore sit alongside wider estate planning and, where appropriate, pre- or post-nuptial arrangements.
Lifetime gifts
Giving shares during lifetime can move future value to the next generation, but the gift needs to be genuine. A gift can reduce the donor’s estate if the donor survives seven years, while retaining benefit in the gifted value can prevent the expected Inheritance Tax outcome.
For Capital Gains Tax, a gift is normally treated as taking place at market value. Qualifying unlisted trading company shares may potentially benefit from Gift Hold-Over Relief, although non-trading assets can restrict relief.
Plan beyond the next generation
Three children may eventually become eight grandchildren with different careers, cash needs and views about dividends or sale. Tag-along and drag-along rights, transfer restrictions and wider family governance can help the company remain workable as ownership fragments.
The aim of succession planning should therefore be broader than transferring shares tax-efficiently. It should leave the next generation with a workable ownership structure that protects the company, the family and the value that has been built over time.
These protections are easiest to agree while shareholders are aligned. Once a death, divorce or family dispute has occurred, changing the articles or agreeing a valuation mechanism can be much more difficult. Succession documentation should therefore be treated as preventative planning rather than something to address only when a transfer is imminent.
