Freezer shares and growth shares are ways to manage wealth and succession in family businesses. Freezer shares lock in current values for older members, growth shares for younger members to enjoy future growth. This balances stability and growth for long term success.

Takeaways

• Freezer shares keep existing equity for older generations and lets younger family members participate in future growth, so wealth preservation and business growth.
• Growth shares allows wealth accumulation for younger generations by capturing future capital growth, aligns their interests with long term success of the family business.
• Freezer and growth shares require careful planning and consideration of legal, tax and governance to ensure smooth wealth transfer across generations.

Family Business Success: Freezer Shares and Growth Shares

Freezer and growth shares are great tools for wealth and succession management in family investment companies. These shares are for family businesses to lock in current values for older members and let younger members enjoy future growth. This preserves existing equity and encourages new investment, stability and growth.

Freezer shares can freeze existing equity value and allow for new investment. Older shareholders maintain control over their assets and get stable returns through preferred dividends, younger family members participate in the company’s future growth. This is great for family businesses where control and next gen involvement is key. It is also crucial to consider the legal and governance aspects when structuring these shares to ensure compliance and prevent disputes.

The popularity of freezer and growth shares in family businesses shows they work well for wealth preservation and future growth. When structured correctly they provide a solid framework for long term business success and smooth wealth transfer across generations.

Overview

In family businesses the personal relationship between family members adds an extra layer of complexity to wealth and succession. As families grow so do their businesses and with that growth comes the need for strategic planning to ensure the business succeeds across generations. For high net worth families Family Investment Companies (FICs) have become the go to vehicle for managing investments and wealth.

Freezing the initial value of assets for the older generation and letting younger generations enjoy future growth is gaining popularity. This preserves the wealth of the older generation and provides a pathway for the next generation to build their own wealth and be involved in the family business. Balancing these interests creates a sustainable business model for long term growth and stability.

Freezer and growth shares are complex financial instruments that can be customised for family businesses. Knowing how they work and the benefits and legal, governance and tax implications will give you the knowledge to implement your wealth succession strategy. Understanding the legal and governance aspects involved is crucial for compliance, managing share structures, and preventing disputes.

Freezer Shares in Family Businesses

Freezer shares freeze the current value of assets for older shareholders and allows for new investment opportunities. This freezes the existing equity value so the older generation retains control and gets stable returns through preferred dividends. By freezing the value of their shares older shareholders get to benefit from their investments without being impacted by future growth.

Balancing existing equity and future growth is key in a family business. Freezer shares do this by allowing the older generation to lock in their investments and let younger family members participate in the company’s future growth. This provides stability for the older generation and incentivises the next generation to contribute to the business’s success.

How Freezer Shares Work

Freezer shares freeze the equity value for older shareholders, preserving their assets at current value. This is done by issuing A shares which represent the company’s current value and have a preferred dividend coupon rate. These shares may also have a preferred dividend linked to the share value so the older generation gets stable returns.

In this structure B shares are issued to younger family members or other new shareholders, representing nominal value with no voting rights. This allows the older generation to retain control and transfer growth opportunities to the next generation.

Freezer shares preserve rights to dividends and capital up to current value so family members in a Family Investment Company get stability and value preservation.

Freezer Share Benefits

Freezer shares have many benefits. They lock in existing equity value so older family members maintain control over their investment and get a predictable income stream through preferred dividends. This stability is critical for older shareholders who rely on these returns for their living.

Another benefit is the tax efficiency of freezer shares. By freezing the value of assets for inheritance tax purposes only the value of the company at the time the shares were created will be subject to inheritance tax so reducing potential tax liabilities. This preserves family wealth and provides a stable base for future investments and growth.

Freezing Existing Equity Value

Freezing existing equity value is a crucial aspect of implementing freezer shares in a family investment company. This process involves locking in the current value of the company’s assets, ensuring that the older generation’s wealth is preserved. By doing so, the value of the shares is “frozen” at the current level, and any future growth in the company’s value will accrue to the growth shares.

To achieve this, the company’s articles of association are modified to create a new class of shares, typically referred to as A shares and B shares. The A shares, held by the older generation, retain the existing equity value and are entitled to a preferred dividend coupon rate on their frozen value. This provides a guaranteed income stream for the older generation during their retirement.

In contrast, the B shares, which are typically issued to younger family members, have a nominal value and do not carry voting rights or dividend rights. However, they are entitled to the future capital appreciation of the company, allowing the younger generation to benefit from the company’s growth.

By freezing the existing equity value, the older generation can ensure that their wealth is preserved, while also providing an opportunity for the younger generation to participate in the company’s future growth. This approach can also help to reduce inheritance tax liabilities, as the frozen value of the shares is not subject to inheritance tax.

In addition, the use of freezer shares can provide a tax-efficient way to transfer wealth to the next generation. By gifting growth shares to family members, the donor can avoid capital gains tax, and the recipient can benefit from the future growth of the company without incurring income tax.

Overall, freezing existing equity value is a key component of implementing freezer shares in a family investment company. By doing so, families can preserve their wealth, reduce tax liabilities, and provide an opportunity for the next generation to participate in the company’s future growth.

Growth Shares in Family Businesses

Growth shares capture future capital growth, younger family members get to benefit from any increase in the company’s value. These shares typically only start to accrue value after a certain threshold is reached, protecting the interests of existing shareholders while giving the next generation opportunities. This aligns the interests of younger family members with long term success of the business and encourages them to get involved.

Holding growth shares allows younger family members to build wealth over time as the business grows. This encourages them to get involved in the business and aligns their financial interests with the company’s future success. Growth shares are a powerful tool for succession planning so the business can continue to thrive across generations.

How Growth Shares Work

Growth shares involve creating a new class of shares that captures future growth while preserving existing equity. These shares only start to accrue value after the company’s value reaches a certain threshold so existing shareholders maintain control and their interests are protected. Growth shares can be structured with no voting rights so existing shareholders retain the power.

Growth shares focus on future capital growth, the value appreciation goes to newer shareholders. This structure gives younger generations the opportunity to benefit from the company’s growth, aligns their interests with long term success of the business and future company growth.

Growth shares offer opportunities for wealth accumulation, younger family members get to get involved in the trading company.

Growth Share Benefits

Growth shares have many benefits for family businesses. They provide a mechanism for wealth accumulation over time so holders can benefit from future growth of company assets. This aligns the interests of younger family members with the business’s success, gets them involved.

Plus growth shares help with tax planning by reducing inheritance tax liabilities for future generations. By capturing future capital growth these shares manage potential tax liabilities and ensure a tax efficient transfer of wealth.

This preserves family wealth and provides a stable base for future investments and growth.

Legal and Governance

Setting up freezer and growth shares requires compliance with legal and governance aspects to match the governance and family objectives. Compliance is key to managing share structures in family businesses. Preserving voting rights when creating these shares is critical to maintain control and protect family interests.

Governance means the company is run properly and the rules are followed, protecting all family members. Having a good governance framework means the business runs smoothly and the share structures support long term success and stability.

Amending the Articles of Association

Amending the Articles of Association is key to creating different classes of shares and to ensure they comply with governance. This involves defining the rights and responsibilities of each share class and the share structure matching the family’s objectives and governance.

The share structure decision may also be influenced by the older generation’s income needs during retirement.

Shareholder Agreements

Shareholder agreements define roles and responsibilities, minimises potential disputes between family members. Clear guidelines and expectations prevents conflicts and misunderstandings, ensures accountability and clarity in the family business.

These agreements are key to succession planning and family harmony.

Tax implications of Freezer and Growth Shares

The tax implications of freezer and growth shares are huge, especially for inheritance tax planning and capital gains tax. Freezer shares freeze the value of existing equity so future growth is not subject to inheritance tax, reduces potential tax liabilities. This preserves family wealth and provides a stable base for future investments and growth.

Growth shares help with tax planning by reducing inheritance tax liabilities for future generations. By capturing future capital growth these shares manage potential tax liabilities and ensure a tax efficient transfer of wealth.

Using freezer and growth shares offers tax and succession planning opportunities, big time.

Inheritance Tax Relief

Freezer shares means future growth doesn’t inflate inheritance tax liabilities, locks in the current asset value for inheritance tax purposes. This prevents deemed gifts that could trigger tax liabilities, makes freezer shares a strategic choice for family businesses. By freezing the value of the property portfolio, freezer shares gives additional inheritance tax relief.

This reduces potential inheritance tax liabilities, so family wealth is preserved for future generations. By freezing the asset value for inheritance tax purposes, freezer shares is a tax efficient way to transfer wealth, makes them a key tool for family businesses.

Capital Gains Tax

Gifting growth shares to younger family members can avoid immediate capital gains tax due to hold-over relief. This allows families to transfer wealth without incurring big tax liabilities, a tax efficient transfer of wealth. Proper planning of the growth share structure is key to managing capital gains tax liabilities when transferring wealth.

When done properly growth shares can qualify for business asset gift relief, minimises the capital gains tax. By planning the growth share structure families can manage tax liabilities and transfer wealth to the next generation smoothly.

Freezer and Growth Shares in Family Investment Companies

Freezer and growth shares in Family Investment Companies (FICs) balances control and value retention with future growth for heirs. FICs is the preferred vehicle for wealth and succession planning for high net worth individuals, a structured way to manage investments and wealth. Understanding the legal and governance aspects is crucial for ensuring compliance and preventing disputes.

Amend the Articles of Association and split the equity into A and B shares creates a structure that supports long term business success and preserves the existing value and captures future growth. Growth shares can be allocated to the younger generation or into a trust to transfer smoothly.

This also maintains family control and tax efficiencies through exemptions like Business Asset Gift Relief and Business Property Relief for Inheritance Tax. By having freezer and growth shares in a Family Investment Company, families can balance value retention and future growth, so the family business continues to thrive and be stable.

Valuation and Issuance of Shares

Proper valuation of a Family Investment Company is key to freezing the existing value with A shares and creating freezer shares to balance with future capital growth. Valuation ensures the share structure matches the company’s current and future value, so there’s a clear difference between current value and future growth. Amending the Articles of Association and equity split is critical to create the difference between current value and future growth, so the share structure matches the family’s goals.

Freezer and growth shares can be A shares that represents current value and B shares for future growth. A shares holds the current company value, B shares is designed to capture the company’s future growth, so younger family members can benefit from future asset growth.

This allows founding shareholders to maintain control of the business and for the next generation to build wealth and contribute to the business success.

Example

A family business had freezer and growth shares implemented. The older generation maintained control and got returns through A shares, the younger generation got the company’s future growth through B shares. This balances value retention and future growth within the family business.

By aligning the interests of both generations the business grew and expanded, this is a proof of this share structure. This example shows the benefits of freezer and growth shares for long term business success and smooth wealth transfer.

Freezer or Growth Shares

Choosing between freezer shares and growth shares involves balancing wealth preservation and future growth. Freezer shares allows the older generation to maintain control and future growth to accure to younger beneficiaries. Dual share structure in family investment companies means efficient wealth management and tax planning and smooth wealth transfer across generations. It is also important to consider the legal and governance aspects when choosing between freezer and growth shares.

Growth shares allows wealth transfer and control for current shareholders. This is a great option for older generation to retain equity and pass it down to the next generation gradually.

Freezer and growth shares is a complete solution for families who wants to balance immediate control with future financial involvement of the next generation.

Factors to Consider

Several factors to consider when choosing between freezer and growth shares are the older generation’s objectives, future growth potential and family dynamics. The older generation may want to preserve existing equity value and control, while future growth potential will determine how the share value will grow over time.

Family dynamics also plays a big role, as conflict or lack of unity can affect the business, so it’s important to choose a share structure that matches the family’s goals.

Talk to Tax Advisers

Talking to tax advisers is important to understand the tax implications and to have a tax efficient wealth transfer strategy. Legal and financial advisers can help design and implement a share structure that matches the family’s goals and comply with tax laws.

By looking into inheritance tax relief, capital gains tax and income tax, tax advisers can help families navigate the tax and succession planning complexities and have a smooth wealth transfer.

Conclusion

Freezer and growth shares are powerful tools for wealth and succession management in family businesses. By freezing the current value of the assets for the older generation and allowing younger members to benefit from future growth, this share structure balances stability and expansion. The legal, governance and tax implications of this shares are significant, so families must consider their options carefully and talk to the experts.

Overall, freezer and growth shares is a way to plan for wealth and succession, for long term business success. By having this share structure families can balance value retention and future growth.

Frequently Asked Questions

What are freezer shares and growth shares?

Freezer shares preserve the current value of assets for older generations, ensuring stability, while growth shares are designed to enable younger family members to gain from future asset appreciation.

How do freezer shares benefit older shareholders?

Freezer shares benefit older shareholders by offering stable returns via preferred dividends while preserving the value of their investments. This ensures financial security during retirement years.

What are the tax implications of growth shares?

Growth shares can significantly reduce inheritance tax liabilities and may qualify for business asset gift relief, enhancing their effectiveness for wealth transfer. Therefore, investing in growth shares can be a tax-efficient strategy.

How do freezer and growth shares support family business succession planning?

Freezer and growth shares facilitate family business succession planning by balancing immediate control with future financial involvement, which encourages the next generation’s engagement and ensures a smooth wealth transition. It is also crucial to consider the legal and governance aspects, as proper governance frameworks and shareholder agreements are essential for compliance, managing share structures, and preventing disputes.

Why is it important to consult with tax advisers when setting up freezer and growth shares?

Consulting with tax advisers is crucial when setting up freezer and growth shares, as they provide insights into tax implications, ensuring compliance with legal requirements while maximizing the benefits of wealth transfer strategies. This professional guidance helps avoid costly mistakes and optimizes the overall financial plan.