Family businesses – inheritance tax and ‘freezing’ the value of your shares

The changes to Inheritance Tax (IHT) Business Relief (BR) taking effect from 6 April 2026 will focus the minds of many family business owners and force a review of their tax and succession plans.

One option to assist owners in limiting their exposure to IHT is the implementation of a ‘freezer’ and ‘growth’ share scheme. Whilst such a scheme is not a new invention, we foresee a greater use of this strategy when navigating the new tax landscape.

Our summary of the upcoming changes to BR (and other budget announcements) can be found here (Edition 3 page 18).

What are ‘freezer’ and ‘growth’ shares?

Freezer shares refer to a process whereby the value of the shares is ‘frozen’ and a new class is created – the growth shares – which benefit from the future capital growth of the business.

Typically, the existing shareholders retain the freezer shares, which entitle them to a preferred amount on their exit from the business or on winding up. The growth shares are allotted or gifted to younger members of the family or family trusts and will gain value once the company reaches an agreed threshold, known as the hurdle rate. The growth shares can be created with or without voting or dividend rights, depending on the preference of the existing shareholders. This is all achieved by amendments to the company’s Articles of Association.

Who may this be suitable for?

For shareholders where any one or more of the following may be relevant, freezer and growth shares are worth consideration:

• If their shares are not expected to fully qualify for BR i.e. investment companies or trading companies with a value in excess of £1 million, this may be a useful strategy to cap the value of their interests and therefore their exposure to IHT. The growth in the value of the company will be outside of the shareholder’s estate, which could represent a significant IHT saving, particularly if the company has a strong trajectory for growth
• If retaining access to capital and a source of income is necessary and other IHT planning strategies, such as outright gifts of their current share capital, are not affordable, retaining the freezer shares allows the shareholder to continue to receive dividends or the proceeds of a share sale up to the hurdle rate
• If continued involvement and retaining control is a priority for the current business owner, this can easily be facilitated by such a reorganisation. As above, careful consideration is given to the voting rights attached to the growth shares and/or by the use of family trusts
• If a shareholder wishes to encourage the next generation of the family’s involvement in the business and incentivise them, allocating growth shares can assist and reward the key players as they grow the business.

Tax considerations

Before any such share reorganisation, a professional valuation of the company is essential and will assist in determining the hurdle rate and, in turn, the tax implications.

Clearly, IHT may be a motivating factor for such a scheme. Whilst there is an obvious IHT advantage in capping the value of the shares, a secondary benefit can be achieved if the shareholder of the freezer shares draws out value by a dividend or share sale. The value of their retained shares will decrease, as will their IHT liability.

It must be noted that any allocation of growth shares is a disposal of the right to participate in the future growth of the company. Careful consideration of the value of such an interest is required to determine the IHT and capital gains tax (CGT) consequences. On day one, the growth shares are likely to have a low or negligible value, representing the ‘hope’ value. Over time, and as the business grows, the value will increase.

If the growth shares are gifted immediately after issue, depending on the recipients of the shares (either an individual or a trust) and the structure of the company, a Potentially Exempt Transfer or Chargeable Lifetime Transfer will take place. In short, the transfer should be structured in such a way to avoid an immediate charge to IHT. The existing shareholders will need to survive seven years from the date of the gift for the value of the growth shares to fall out of account when valuing their estates for IHT purposes.

For CGT purposes, if the growth shares are not subscribed for at market value, a CGT charge may be triggered. However, holdover relief may be available if the business is a qualifying trading business or if the shares are transferred to a family trust. If holdover relief is available, this will assist in deferring any CGT charge until the recipient disposes of the shares.

There are also income tax consequences to consider, which are beyond the scope of this article.

Freezer and growth shares: a practical example

Mr X owns all of the shares in a growing manufacturing company; there are 1,000 shares. The shares in the company have been valued as currently worth £2 million. The value of the company means that after 6 April 2026 and the introduction of the cap on BR, there will be an IHT liability following Mr X’s death.

After taking advice, Mr X decides to implement a freezer and growth share scheme. He decides that 500 shares will be reclassified as freezer shares, and 500 shares will be reclassified as growth shares. The hurdle is set as £2 million in total – this is the present value of the company, which will accrue to Mr X.

Mr X make a gift of the growth shares

Mr X has two sensible adult children and decides to make a gift of 250 growth shares to each child. Mr X retains 500 freezer shares. To the extent there is a gain to defer, an election for Holdover Relief can be made so that the gift does not trigger a CGT charge.

If Mr X decides to sell the company during his lifetime, he will still have the benefit of the first £2 million of the sale proceeds; the remaining value will belong to the holders of the growth shares. The company can also pay dividends from its profits – this provides an income to Mr X as required during his lifetime.

Mr X passes away

Mr X passes away eight years after he made the gift of his shares. The value of all of the shares in the company is now £4 million. As Mr X owned only freezer shares, however, the value of his shares remains fixed at £2 million (assuming he has not benefitted from any dividend or share sale in the last eight years).

The remaining value of the company belongs to his children, as holders of the growth shares, and the £2 million increase in the company’s value attributable to the growth shares is not brought into account when valuing Mr X’s estate for IHT. In addition, as the gift was made more than seven years ago, the original value of the growth shares has also fallen out of account when valuing his estate.

Mr X’s freezer shares will still be exposed to IHT, potentially incurring a charge of £200,000 ((£2,000,000-£1,000,000) @ 20%). However, an IHT saving of £400,000 has been made by ensuring the growth in value has accrued to his children.

One option for mitigating IHT

A freezer and growth share scheme is one of many options available to owners of family businesses who wish to mitigate IHT and plan for the succession of their businesses. Now is the time for business owners to review their IHT exposure and options to help manage the upcoming changes in tax legislation.