The changes to IHT
On 21 July the Government published draft legislation for the restrictions on inheritance tax (IHT) relief for businesses, showing that it plans to go full steam ahead with the changes despite vocal opposition.

Whatever one’s views on the policy, the increased exposure to IHT may pose a financial challenge to business owners. Anyone who owns property which currently qualifies for business property relief (BPR) at 100% (qualifying property) will wish to review their estate planning arrangements before the changes come into effect from 6 April 2026.

Currently, qualifying property benefits from relief from IHT charges which arise on death, on lifetime transfers, and on property held in trust. There is 100% relief or 50% relief depending on the type of property.

Shares in an unlisted company qualify for relief at 100%, as long the company’s business does not consist mainly of dealing with securities, stocks or shares, land or buildings, or in making or holding investments.

From April 2026, each individual will have an allowance of £1m for property qualifying for BPR at 100%. Amounts above £1m will only attract 50% relief, in other words the property over the £1m limit will be subject to inheritance tax at 20% (assuming the spouse exemption doesn’t apply).

Shares listed on AIM, or another stock exchange which is not a recognised stock exchange, currently qualify for relief at 100% but from April 2026 this will be restricted to 50% whatever the value (the £1m allowance will not be available for this type of property). This brings AIM shares into line with shares listed on a recognised stock exchange.

Why is this relevant to PhilCos?
The changes potentially create a significant headache for business owners. Whereas it has historically been possible to pass the shares in a family business to the next generation without triggering a tax charge, from April 2026 doing so may create a significant IHT liability. As the charge arises when the shares are gifted (or sold for less than their market value), the estate/beneficiaries may not have the funds to available to pay the tax bill (although an instalment option will be available for paying the IHT in 10 equal annual instalments without interest).
One obvious consequence may be that more business owners decide to sell rather than pass on their companies to the next generation. However the PhilCo model could offer an alternative, allowing for continuity in the management of the business and a portion of the profits to be applied for charitable purposes, whilst also potentially mitigating the burden of a significant tax charge for the next generation.

What is involved in setting up a PhilCo structure?
For the purposes of this article a PhilCo refers to a company in which 10 per cent or more of the shares are held by a charity. This may be a pre-existing charity or newly formed, although it should be noted that it can take up to 12 months for a new charity to be created.

The shareholder concerned will transfer the shares to the charity, generally by way of gift. The articles of association and any shareholders’ agreement relating to the company will need to be reviewed to ensure that any pre-emption rights and other restrictions on the transfer of shares are complied with. Any necessary consents from other shareholders will also need to be obtained.

Although this may seem surprising, it is not automatically the case that the charity is able to accept the gift of the shares. The charity will need to undertake due diligence in relation to the company and its business to ensure that the shares are a suitable asset for the charity to hold. The trustees will also need to consider whether they have suitable expertise and resources to be able to monitor the investment, and how to manage any conflicts of interests that may arise (particularly if there is family connection or overlap between the charity and company). Thinking ahead, the charity’s trustees will need to be aware that they may have to consider selling / divesting the shares from time to time if it is not in the interests of the charity to hold on to them (for example, the relevant company’s financial performance or reputation materially falls).

Depending on the size of the shareholding, the existing constitutional arrangements of the company may need to be reviewed and amended to ensure that the interests of the charity are protected. This may include the right for the charity to appoint a director or observer to the board, a list of reserved matters requiring the approval of the charity and the provision of specified financial information to the charity.

Tax on the gift of shares to charities
Generally, gifts of shares to charities will not trigger any charge to capital gains tax, IHT or stamp duty. This applies both to gifts during the donor’s lifetime and on death. Further in certain circumstances, there is an additional level of relief available to gifts of “qualifying investments” (broadly listed shares on certain specified stock exchanges). In these cases, the value of the asset given away is available as an income tax/corporation tax deduction in the year the gift is made.

If an individual leaves at least 10% of the taxable value of their estate to a UK charity, then the rate which applies to the rest of their estate is reduced to 36%.

Final thoughts
Clearly transferring shares to a charity will not be appropriate for everyone and it very much depends on individual circumstances. However if you are thinking about succession then the upcoming changes to IHT will clearly be a consideration and a PhilCo structure could form part of your strategy.

About the authors:
Scott Leonard is a corporate partner at Bates Wells who regularly advises on corporate structures for purpose led businesses, steward owned companies and PhilCo structures – Scott Leonard | Bates Wells

James Badock is a private client partner at Winslows who specialises in all aspects of Private Client advice – James Badcock – Winslows