Case of the month – Inheritance Tax Planning and Family Provision for a Vulnerable Beneficiary
Introduction
Our client approached us, intending to understand their current exposure to Inheritance Tax (IHT) and explore strategies to preserve and pass on wealth in a tax-efficient manner to their adult child who is unable to work. Ensuring long-term financial provision for him was a central concern in their planning.
Their estate includes a mix of cash, pensions, ISAs, and property, both residential and investment. While both have UK domicile and residency, they also intend to purchase a property in UAE for seasonal use. Wills are in place but require updating, and they are seeking clarity on structuring their estate for maximum tax efficiency, particularly with their childs welfare in mind.
The Issue
Based on the current value of their estate, we calculated an IHT liability of approximately over £1 million, leaving only 67% of the estate available for distribution. Our clients wished to explore ways to reduce this liability, safeguard their childs financial future without impacting entitlement to benefits, and understand the implications of setting up a Family Investment Company (FIC) or trust.
Our Solution
We advised on several key strategies to reduce their IHT exposure, while preserving control and flexibility:
Lifetime Gifts of Cash
The estate contains approximately £310,000 in liquid cash. We recommended making significant cash gifts now, as these qualify as Potentially Exempt Transfers (PETs). Provided they survive seven years from the date of gifting, these sums would fall outside their estates entirely. Taper relief would apply after three years for gifts exceeding the nil-rate band.
Regular Gifts Out of Income
With a gross salary of over £100,000 and modest living costs, our client can make regular gifts from surplus income. Provided these are consistent and well-documented, they are exempt from IHT, regardless of value. This approach is particularly effective for long-term planning.
Family Investment Company (FIC)
We explored the use of a FIC as a vehicle for holding investments, potentially funded via loans from surplus income or pension lump sums. A FIC allows the client to retain control through voting shares, while future growth can be attributed to a separate share class held by or for the benefit of their child. If the loan account is gifted, this becomes a PET, further reducing the estate’s value.
Use of Trusts
Trusts offer a valuable alternative or complement to a FIC. Each client could contribute up to £325,000 without incurring an immediate IHT charge. Trusts may also be more appropriate for vulnerable beneficiaries, depending on benefit considerations and access controls.
Will Planning and Property Structuring
We advised updating the wills to reflect current intentions, ensuring the main residence passes to their son. Holding the home as tenants in common and considering a co-occupation agreement may also support their goals. Plans to purchase a property in UAE should consider whether to hold it personally or via a company, given it remains within the UK IHT net due to domicile.
The Outcome
Through a combination of gifts, structural planning, and careful estate design, our clients could reduce their IHT liability from £1.078 million to approximately £388,000, a potential saving of £700,000. This ensures a greater portion of their estate (up to 80%) is passed on, with appropriate safeguards in place for their son’s financial future.
How EMI schemes can help your business keep key employees
‘The Great Resignation’, an influx of employees leaving their jobs in unprecedented numbers over the last few years.
Since the pandemic, many people have re-evaluated their priorities, seeking better work-life balance, more meaningful roles, flexible working and growth opportunities. This trend shows no sign of slowing and reflects a broader shift in generational expectations in the workplace.
This wave has affected businesses of all sizes, but smaller companies, particularly those in more specialist fields, can feel a much larger impact. Finding and keeping the right people has become one of the biggest challenges for SMEs. Losing talented employees can disrupt growth, affect consistency across the business, and create gaps that are difficult to fill.
What’s the solution?
Nothing ever is a guarantee, but there are some tried and tested ways to give your team a stronger reason to stay and remain motivated.
One of the most effective tools is an EMI (Enterprise Management Incentive) scheme. This is a government-approved share option scheme, which allows businesses to grant selected employees the right to buy shares in the company at a future date at a discount (or even todays price).
By giving employees a stake in the business, it gives them more incentive for contributing to the growth in the company and hopefully staying in the long run. This incentive isn’t something that would particularly be easy to give up. If the shares increase in value, employees can reap significant gains upon selling them.
Can’t I just grant normal share options? Why is it tax efficient?
You can grant normal (unapproved) share options, but EMI options are specifically designed to make employee ownership more tax efficient for both the business and the employee – so why wouldn’t you choose EMI if you could?
Under a non-approved scheme:
On exercising their options, the employee has to pay income tax and NICS at rates of up to 45%*.
On sale, CGT at up to 24%* would be due based on the Market Value, less any amounts subject to income tax.
A CT deduction can usually be made for the company, based on the amount on which the employee is subject to income tax.
Under an EMI scheme:
On exercising their options, if done within 10 years of the grant, with no disqualifying event, and no discount at grant, there will be no income tax or NICS on exercise.
CGT is payable on the sale of the shares, but only up to 24%* (with the potential to claim a lower rate of 14%** Business Asset Disposal Relief, with less strict conditions under EMI).
A CT deduction can usually be made for the company, based on the difference between the market value when the shares were acquired and the amount the employee paid for them.
*based on current rates as of October 2025
**subject to increase to 18% from 6th April 2026
How does my business set this up?
Before granting EMI share options, a business first needs to confirm it meets the eligibility criteria. The company must be an independent trading entity with gross assets of £30 million or less and fewer than 250 full-time equivalent employees. There are also conditions relating to the employees themselves, so it is important to involve a suitably qualified tax adviser to ensure compliance before moving forward.
While there is no formal HMRC approval process for EMI schemes, it is possible to agree the share valuation in advance. This is an area where experienced advisers can add real value, helping to reduce risk and ensure the scheme is structured effectively.
Companies are required to notify HMRC within 92 days of granting options, and there is also an annual reporting requirement to maintain compliance.
You would need to consult a solicitor to assist in drafting the relevant legal documentation, such as the option agreements, to ensure the scheme is legally robust.
Will it fit the needs of my business?
One of the biggest advantages of an EMI scheme is its flexibility. The structure can be tailored to the business’s goals and workforce, allowing it to be a powerful retention and motivation tool. For example:
The number of options or timing of exercise can be linked to individual or corporate performance targets.
Exercise may be tied to specific events or milestones, ensuring alignment with the company’s growth objectives.
In short, an EMI scheme can be designed to fit the unique needs of each business, providing a tax-efficient way to reward and retain the employees who are most critical to its success.
Next Steps
If you’re looking for ways to retain key employees and reward their contribution to your business, an EMI scheme could be the solution. If you want to find out more, please get in touch.
VAT and Property Transactions: Navigating Costly Traps
Property VAT is one of the most complex and high-risk areas for businesses. The sums involved are large, the rules are technical, and the penalties for mistakes can be severe.
At ETC Tax, we regularly see avoidable VAT errors that lead to irrecoverable costs, HMRC disputes, or costly deal delays.
With this in mind, we have put together a checklist to help you avoid the most common traps.
The Option to Tax (OTT), Miss It and Pay the Price
Why it matters:
Opting to tax allows a business to charge VAT on rent or sales and reclaim VAT on associated costs (like refurbishments or legal fees). However, an OTT is only valid if properly made and recorded.
Check that:
The OTT has been formally notified to HMRC.
The landlord’s position is confirmed in writing.
Accurate records of the election are kept for future reference.
Common mistake: Assuming an OTT was made when it wasn’t. We often see clients who have incurred six-figure refurbishment costs, only to find their VAT claim rejected because no valid OTT was in place.
Tip: Always confirm OTT status before incurring expenditure.
Transfer of a Going Concern (TOGC), Relief or Risk?
Why it matters:
Where a property sale is part of a wider business transfer, VAT may not apply if the deal qualifies as a TOGC. This saves VAT on the purchase price and reduces SDLT, but only if strict conditions are met.
Check that:
Both buyer and seller are VAT-registered.
The property will be used for taxable business purposes.
Any Option to Tax is valid and in place.
Common mistake: Assuming TOGC applies without checking the conditions or obtaining VAT registration in time.
Tip: Confirm TOGC eligibility early; structuring errors can add millions to a deal.
Partial Exemption, Managing Mixed Supplies
Why it matters:
If your business makes exempt supplies (e.g. residential lettings, education, health, or finance), you may not be able to recover all input VAT. The partial exemption rules determine how much you can reclaim.
Check that:
The standard method of VAT recovery produces a fair result.
You’ve considered applying for a special method if the standard one is unfair.
Any special method is agreed with HMRC in advance.
Tip: Specialist advice can help negotiate fairer recovery rates and defend them in HMRC reviews.
Overlooked Areas, Deposits, Inducements, and Break Payments
Why it matters:
Payments such as deposits, lease inducements, dilapidations, and break fees can all have VAT implications. HMRC has become increasingly aggressive in challenging incorrect treatments.
Check that:
You’ve identified all side payments in the transaction.
You’ve clarified whether each payment is consideration or compensation.
VAT advice has been sought before contracts are signed.
Common mistake: Reviewing VAT treatment after signing agreements, when it’s too late to change the terms.
Tip: Early review avoids disputes and unplanned VAT costs.
Why Specialist VAT Advice Matters
Property VAT is too complex to rely on assumptions or generalist advice. Getting specialist input early protects both value and compliance.
Contract and lease reviews to confirm VAT treatment.
Advice on Options to Tax and TOGC eligibility.
Support with partial exemption calculations and HMRC negotiations.
Guidance on complex payments (deposits, inducements, break clauses).
Representation in HMRC disputes or recovery challenges.
Next Steps
VAT on property can be difficult to navigate, but with the right planning, most risks are avoidable.
Missed OTTs, incorrect TOGC assumptions, poor partial exemption management, or overlooked payments can all cost thousands, but with early specialist advice from ETC Tax we can safeguard VAT recovery and keep your transactions on track. Please get in touch to find out how we can support you.
Find out what we have been answering for you this month…
Q
If the company issues shares to an employee, how is that reported/taxed?
A
Shares issued to employees fall under the Employment Related Securities (ERS) legislation. The value of the shares will usually be reported on form P11D. Online reporting is required by 5 July following the end of the tax year.
With regard to the tax payable, obviously this will depend on the market value of the shares. It is important to have a robust valuation. For a trading company the valuation will usually be based on a multiple of the company’s maintainable earnings to arrive at the Enterprise Value of the company. Surplus cash can be added to arrive at the Equity Value.
Depending on the number of shares issued a discount can be applied to the pro-rata value of the shareholding. For holdings of 5% or less HMRC will usually accept a discount of at least 70%.
Q
Apart from EMI share options what other share schemes are popular?
A
Not all companies qualify for EMI so instead a Company Share Option Plan can be used. Not as attractive as EMI as the maximum value of share options under CSOP is £60,000 and the shares have to be help for 3 years.
For smaller companies, growth shares are increasingly popular and can incentivise employees. The shares will only have value when a specified hurdle is achieved, which means that on issue HMRC should accept that the value of the shares is low/par value.
Q
I have a client that returned to the UK during the 2023/24 UK tax year after 10 consecutive years of non-residence. When will their first year of residence for FIG purposes be?
A
Although the FIG regime started on 6 April 2025, you can still be a qualifying new resident from the 2022/23 tax year. So in this case, the client’s first year of residence under the FIG regime will be 2023/24.
If you’ve sold a second home or investment property recently, it might be worth giving your tax return a quick once-over. HMRC certainly are.
In the past year, HMRC has seriously stepped up its checks on capital gains tax (CGT). More than 10,000 property-related investigations took place last year, the highest in half a decade. And it’s paying off. They recovered a whopping £256 million in underpaid CGT, which is 41% more than the previous year. HMRC means business.
Why the Sudden Crackdown?
After a few quieter years during and after the pandemic, HMRC is back in action. The government wants to close the so-called “tax gap” and has handed HMRC extra funding, more staff, and better tech to help them do it.
Property sales are right at the top of their hit list. When the housing market boomed after lockdown and the temporary stamp duty cuts came to an end, plenty of people decided to cash in on second homes or investment properties. But not everyone realised what that meant for their capital gains tax bill, and HMRC’s data tools have been picking up on that ever since.
Data Is Doing the Detective Work
The old days of paper records and manual checks are long gone. HMRC now uses powerful data systems that pull information from banks, investment platforms, the Land Registry and even overseas tax authorities.
Thanks to artificial intelligence and data analytics, they can quickly spot patterns and red flags that might point to undeclared gains.
This isn’t just about clawing back unpaid tax. It’s part of a bigger shift towards smarter, data-led compliance. And with more trained investigators and better digital tools at their disposal, it’s safe to say property tax checks are only going to increase from here.
What You Should Do
If you’ve sold a second property, an inherited home or a buy-to-let recently, now’s the perfect time to make sure your CGT reporting is spot on.
Here’s how to stay ahead:
Check your records: Take a close look at sale prices, purchase costs and any allowable expenses.
Report on time: Most UK residential property sales need to be reported within 60 days.
Get advice early: A quick chat with an adviser can help you catch and fix any issues before HMRC gets in touch.
With HMRC’s technology and data sharing now sharper than ever, keeping things accurate and up to date is essential. And if anything feels unclear, getting professional advice can save you a big headache later on.
Need some help? Get in touch and we’ll make sure everything’s in order.
A recent survey of small business owners has revealed that eight in ten of them have no exit plan. This is even though life, health, and market conditions may sometimes dictate exits before an owner is ready.
Many entrepreneurs understandably feel a deep emotional connection to their business, especially when it has been built from scratch. However, failing to plan an exit can have serious consequences for both value and tax efficiency.
Then, if you are forced into a position without having taken the time to think about the consequences, well that may not end well.
The valuation problem
One of the main challenges reported by business owners was uncertainty around valuation. How much is my business worth? How do I know if I am getting a fair value for it?
These are often difficult questions to answer without the context of what a potential buyer might actually pay. But valuation is not just about market value. For tax purposes, HMRC also applies its own rules when looking at a sale or succession, which can affect how reliefs apply and what the eventual tax liability looks like.
Asset sale vs share sale
Another key decision is whether the exit will be structured as a sale of the company’s shares, or of its underlying assets. Each route has different implications: a share sale is usually simpler and may be more tax-efficient for the seller (for example, potentially qualifying for Business Asset Disposal Relief. However, an asset sale can be more attractive to the buyer, who may prefer to “cherry-pick” assets without inheriting company liabilities, but this is often less efficient for the seller, as tax charges can arise both within the company and on extraction of proceeds.
Pre-sale tax health checks
The survey also noted that only a fifth of business owners have ever sought professional advice on a sale.
This is where a pre-sale tax “health check” from ETC Tax comes in. Such a review typically covers:
Obtaining a professional valuation to set realistic expectations.
Checking eligibility for Business Asset Disposal Relief (and restructuring shareholdings where possible to optimise relief).
Reviewing the company’s structure – for example, whether subsidiaries or non-core assets could and should and be removed prior to a sale.
Planning around loan accounts and dividends to avoid unexpected tax charges.
Reviewing the balance sheet to deal with excess cash, inter-company loans, or property that may complicate a deal.
Carrying out “self-diligence” to make sure that the tax affairs of the business and its owners are in order before a buyer’s due diligence highlights problems.
Beyond sale, succession and wind-down
Interestingly, the survey also found that many owners consider simply “handing” their business to family, or even winding it down.
But even these options may come with their own tax considerations. Passing a business to the next generation may mean that certain inheritance tax reliefs, such as Business Relief, apply but only if conditions are met and changes are coming from April 2026.
Equally, winding down without a sale may mean leaving value on the table. However, if that is the chosen route, careful planning can ensure extraction of cash is effected tax efficiently, whether through capital treatment on liquidation or planning for distributions.
Conclusion
The survey highlights a worrying truth: most business owners are unprepared for their own exit. Hmmm…
But whether the objective is a sale, succession, or simply winding-down, the earlier planning starts, the more control the business owner has over value, timing, and tax outcomes.
If you have any queries about this article or in relation to business exit planning and valuations, or would like to enquire about a pre-sale tax health check (it’s never too early!) then please get in touch.
