The Carrow family company and trust: written practice

The Carrow family company and trustSection A style · IHT on gifts and death · 50 marks

Edith Carrow, aged 79, has asked your firm to advise her on passing her family company and an investment property to her family. Edith has always been UK resident, so she is a long-term UK resident. She was divorced in 1994 and has not remarried. It is now 1 November 2025.

Values of holdings in Carrow Precision Ltd at 1 December 2025
Holding in Carrow Precision Ltd	Value at 1 December 2025 (£)
100% (50,000 shares)	2,000,000
60% (30,000 shares)	1,320,000
40% (20,000 shares)	480,000

Note 1: Carrow Precision Ltd. Edith formed this unquoted trading company, a precision engineering business, in 1998, subscribing £50,000 for all of its 50,000 ordinary shares, and she has owned all of them since. She is still a director. Her son Daniel, aged 52, is its managing director. Daniel says that all of the company's assets are used in its trade; the firm has not yet seen the company's latest accounts. For your calculations, assume that Daniel is right. The table shows the values of holdings in the company at 1 December 2025. Note 2: Gift of shares. On 1 December 2025 Edith will give 30,000 shares (a 60% holding) to Daniel. Daniel intends to keep them: assume that he still owns them, and that they still qualify for business property relief, at any date of Edith's death. Edith has never claimed business asset disposal relief. Note 3: The trust. On 15 January 2026 Edith will transfer an industrial unit in Swindon, let to an unconnected tenant, to the trustees of a new discretionary trust for her grandchildren. She bought the unit in 2009 for £230,000; it is worth £520,000. The trustees will pay any inheritance tax on the transfer. The draft trust deed excludes Edith from any benefit. Gift holdover relief will be claimed on the industrial unit in every case. Note 4: Earlier gifts. On 1 August 2023 Edith gave £90,000 in cash to her daughter Ruth. She has made no other lifetime gifts. Note 5: Edith's income. Edith's taxable income for 2025/26 will be £64,000, all of it non-savings income, whatever she decides. Note 6: Chloe. Daniel's daughter Chloe, aged 20, is a university student. The trustees plan to pay her £5,500 out of the trust's income on 1 March 2026. Her only other income for 2025/26 is £4,000 from part-time employment, from which no tax was deducted. Note 7: Daniel's telephone call. Yesterday Daniel telephoned your firm. He asked whether the share transfer form could be dated 1 March 2025, 'so that the seven-year clock starts earlier', and asked for a copy of your advice to Edith and of her will. He also said that the tenant's rent 'can still be paid to Mum informally, because she needs the income'. Note 8: Rules to apply. Business property relief is given at 100% on unquoted trading company shares owned for at least two years. The inheritance tax annual exemption is £3,000 for each tax year. Assume that the 2025/26 rules, rates and allowances continue to apply in future years. Ignore national insurance contributions.

(a) Capital gains tax payable by Edith for 2025/26 on the gift of the shares to Daniel if gift holdover relief is not claimed on the shares and business asset disposal relief is claimed (£). [3]

(b) Daniel's base cost of the 30,000 shares for capital gains tax if gift holdover relief is claimed on them (£). [2]

(d) Additional inheritance tax payable by the trustees on the industrial unit if Edith dies on 1 March 2030 (£). [4]

(e) Income tax repayable to Chloe for 2025/26, as a positive figure (£). [3]

(f) Explain the inheritance tax treatment of the gift of shares to Daniel, both when it is made and if Edith dies within seven years, including what would happen if Daniel sold the shares before Edith's death. [6]

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(g) Explain the capital gains tax consequences of both gifts, the reliefs available on each and who must make each claim, and compare a lifetime gift of the shares with Edith keeping them until her death. [8]

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(h) Explain the inheritance tax position of the transfer of the industrial unit for the trustees and for Edith, now and in future years, and how the trust payment to Chloe is taxed. [6]

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(i) Explain the ethical and professional issues for your firm arising from Daniel's telephone call, and what the firm should do. [5]

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(j) Professional skills (5 marks): communication, for setting out your answer as a letter to Edith that states your recommendation first, uses her name and explains technical terms in plain words with a short summary; analysis and evaluation, for comparing the capital gains tax now with and without gift holdover relief on the shares, and for weighing a lifetime gift of the shares against Edith keeping them until her death. [5]

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(k) Professional skills (5 marks): scepticism, for questioning Daniel's statements that all the company's assets are used in its trade and that the rent can still be paid to Edith informally, and saying what evidence or action is needed; commercial acumen, for practical points such as how the trustees will fund the inheritance tax, Edith's loss of the rental income and her loss of control of the company. [5]

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		Normal rates	Dividend rates
Basic rate	£1 – £37,700	20%	8·75%
Higher rate	£37,701 – £125,140	40%	33·75%
Additional rate	£125,141 and over	45%	39·35%
Savings income nil rate band – Basic rate taxpayers			£1,000
Savings income nil rate band – Higher rate taxpayers			£500
Dividend nil rate band			£500

	£
Personal allowance	12,570
Transferable amount	1,260
Income limit	100,000

Days in UK	Previously resident	Not previously resident
Less than 16	Automatically not resident	Automatically not resident
16 to 45	Resident if 4 UK ties (or more)	Automatically not resident
46 to 90	Resident if 3 UK ties (or more)	Resident if 4 UK ties
91 to 120	Resident if 2 UK ties (or more)	Resident if 3 UK ties (or more)
121 to 182	Resident if 1 UK tie (or more)	Resident if 2 UK ties (or more)
183 or more	Automatically resident	Automatically resident

The relevant base level of CO2 emissions is 55 grams per kilometre.
The percentage rates applying to petrol cars (and diesel cars meeting the RDE2 standard) with CO2 emissions up to this level are:
51 grams to 54 grams per kilometre	16%
55 grams per kilometre	17%
The percentage for electric cars with zero CO2 emissions is 3%.
For hybrid-electric cars with CO2 emissions between 1 and 50 grams per kilometre, the electric range of the car is relevant:
130 miles or more	3%
70 to 129 miles	6%
40 to 69 miles	9%
30 to 39 miles	13%
Less than 30 miles	15%

Annual allowance 2022/23	£40,000
2023/24 to 2025/26	£60,000
Minimum allowance	£10,000
Threshold income limit	£200,000
Income limit	£260,000

Plant and machinery
Main pool	18%
Special rate pool	6%
Cars
New cars with zero CO2 emissions	100%
Second-hand cars with zero CO2 emissions	18%
CO2 emissions between 1 and 50 grams per kilometre	18%
CO2 emissions over 50 grams per kilometre	6%
Annual investment allowance
Rate of allowance	100%
Expenditure limit	£1,000,000
Enhanced capital allowances for companies
Main pool first year allowance	100%
Special rate pool first year allowance	50%
Structures and buildings allowance
Straight line allowance	3%

Financial year	2023	2024	2025
Small profits rate	19%	19%	19%
Main rate	25%	25%	25%
Lower limit	£50,000	£50,000	£50,000
Upper limit	£250,000	£250,000	£250,000
Standard fraction	3/200	3/200	3/200

Standard rate	20%
Registration limit	£90,000
Deregistration limit	£88,000

Days late	Penalty
Up to 15 days	None
16 to 30 days	3%
More than 30 days	6% plus a daily penalty at an annual rate of 10%

Nil rate band	£325,000
Residence nil rate band	£175,000
Rate of tax on excess over nil rate band – Lifetime rate	20%
– Death rate	40%

Years before death	Percentage reduction
More than 3 but less than 4 years	20%
More than 4 but less than 5 years	40%
More than 5 but less than 6 years	60%
More than 6 but less than 7 years	80%

Lifetime limit – business asset disposal relief	£1,000,000
investors’ relief	£1,000,000
Rate of tax	14%

Class 1 Employee	£1 – £12,570 per year	Nil
	£12,571 – £50,270 per year	8%
	£50,271 and above per year	2%
Class 1 Employer	£1 – £5,000 per year	Nil
	£5,001 and above per year	15%
	Employment allowance	£10,500
Class 1A		15%
Class 4	£1 – £12,570 per year	Nil
	£12,571 – £50,270 per year	6%
	£50,271 and above per year	2%

Official rate of interest	3·75%
Rate of interest on underpaid tax	8·50%
Rate of interest on overpaid tax	3·50%

Taxpayer behaviour	Maximum penalty	Minimum penalty – unprompted disclosure	Minimum penalty – prompted disclosure
Deliberate and concealed	100%	30%	50%
Deliberate but not concealed	70%	20%	35%
Careless	30%	0%	15%

Up to 10,000 miles	45p
Over 10,000 miles	25p

Up to £150,000	0%
£150,001 – £250,000	2%
£250,001 and above	5%