IHT on Growth Shares UK: Inheritance Tax on Hurdle Shares, Alphabet Shares, and Founder Share Classes (2026)
Growth shares are included in the IHT estate at the market value of the rights they carry above the hurdle. HMRC SAV uses an option pricing approach to value them. Where the company qualifies as an unquoted trading company, 100% BPR may apply — but the two-year ownership test and the April 2026 £1m cap both affect the outcome.
| Scenario | BPR Available? | Notes |
|---|---|---|
| Growth shares in qualifying trading company (≥2yr, ≤£1m) | 100% BPR | s105(1)(bb); wholly/mainly trading; no binding contract |
| Growth shares (≥2yr) — above £1m (post-Apr 2026) | 50% BPR | Effective IHT rate 20% on above-cap excess |
| Growth shares (<2yr ownership at death) | No BPR | Two-year test not met; full 40% IHT |
| Growth shares — compulsory buyback on death | No (s113) | Binding contract = BPR unavailable |
| Growth shares — cross-option agreement | Yes (BPR preserved) | Optional transaction; neither party obliged |
| Growth shares in investment company | No (s105(3)) | Investment exclusion; trading test failed |
Growth Shares and IHT: A Complete Guide
What are growth shares?
Growth shares (also called hurdle shares, management equity, or alphabet share classes — e.g. B shares, C shares) are a class of shares in a private company issued at a nominal or low subscription price at the point the company's total equity value sits below a specified threshold (the 'hurdle'). The economic design: ordinary shares (held by founders/investors) carry all value up to the hurdle; growth shares carry all value above the hurdle. If the company exits at a value above the hurdle, the growth share holders receive a share of the exit proceeds above the hurdle — the founders and investors receive up to the hurdle value, and the management team splits the excess. Growth shares are used to incentivise senior employees and management without diluting the founders' existing value. At the point of issue, growth shares have a low (or nil) taxable value because the current total company value is at (or below) the hurdle — there is nothing above the hurdle to share. As the company grows, the growth shares become increasingly valuable. They have been widely used in PE-backed companies and management buyouts, and increasingly in smaller entrepreneurial businesses.
Valuing growth shares for IHT: HMRC's approach
Growth shares are included in the IHT estate at their open market value on the date of death (s160 IHTA 1984). The valuation of growth shares is complex and often contested — HMRC SAV has developed specific approaches. The key principles: (1) The 'Black-Scholes' or options pricing approach: growth shares are economically similar to a call option on the company's equity — the holder receives value if the company exits above the hurdle. Option pricing models (Black-Scholes or binomial models) can be used to value the growth shares. (2) Comparator company analysis: the company's enterprise value is estimated using earnings multiples or revenue multiples from comparable transactions; the growth shares' entitlement above the hurdle is then valued. (3) Discount for risk: growth shares carry risk — the company may not reach the hurdle; the shares may be subject to vesting conditions; there may be minority discounts. HMRC SAV generally expects the valuation of growth shares to use the option pricing approach (or equivalent) rather than a simple pro-rata of the total company value. Executors should commission a specialist IP/share valuer with private company growth share experience to produce a defensible HMRC SAV valuation.
Minority discounts on growth shares
Growth shares are typically minority interests in private companies — the holder's economic entitlement is to a fraction of the above-hurdle proceeds, not to a controlling stake. HMRC SAV generally accepts minority discounts on unlisted company shares where the holding does not represent a controlling interest (above 50%). Typical minority discounts applied in HMRC negotiations: 20–35% for holdings under 25%; 10–20% for holdings of 25–50%. The minority discount reduces the IHT value of the growth shares — working in the estate's favour. However: the related property rules (s161 IHTA 1984) can eliminate or reduce the minority discount where the deceased's spouse or civil partner holds shares in the same company. The related property rule values the deceased's shares as a proportionate share of the combined spousal holdings — potentially at a higher (controlling-interest) value. Growth share holders should review whether related property rules apply if their spouse also holds company shares.
BPR on growth shares: the qualifying conditions
Growth shares in an unquoted trading company can qualify for 100% Business Property Relief under s105(1)(bb) IHTA 1984, provided: (1) The shares are unquoted (not listed on a recognised stock exchange — AIM is treated as unquoted for BPR; the main market of the London Stock Exchange is not). (2) The company is wholly or mainly trading — the investment test (s105(3)) excludes companies that mainly hold investments rather than trade. Most private companies with growth share schemes are trading companies. (3) Two-year ownership test: the growth shares must have been owned by the deceased for at least two years before death. The clock runs from the date of acquisition (when the shares were subscribed for, or transferred). (4) Not subject to a binding sale contract at date of death (s113). A cross-option agreement (mutual options between the estate and surviving shareholders — neither party obliged to transact) preserves BPR; a mandatory sale obligation destroys it. From April 2026: the combined BPR/APR cap limits 100% BPR to £1m per estate. Growth shares above this threshold attract only 50% BPR (effective 20% IHT rate on the excess).
Growth shares in trust: IHT periodic and exit charges
Where growth shares are placed into a discretionary trust (either by the founder creating the trust, or by an employee transferring shares post-issue), the trust is subject to the relevant property regime: a CLT is created on the initial transfer (20% IHT above the NRB on the value transferred, if any); periodic charges at 6% of the trust's value above the NRB every 10 years; exit charges on distributions. The use of a trust for growth shares raises: (1) When were the shares contributed to the trust? If at a time when the shares had low or nil value (near the hurdle at time of issue), the CLT may be very low or nil. (2) Growth in value within the trust: as the company grows, the trust asset value increases — periodic charges apply at each 10-year anniversary on the then-value above the NRB. (3) BPR on the periodic charge: if the growth shares qualify for BPR at the 10-year anniversary date, the periodic charge is reduced (BPR applies to reduce the trust's qualifying assets below the NRB). However, from April 2026, the £1m BPR cap applies to trusts as well — each trust with the same settlor shares a single £1m cap.
Succession planning for growth share holders
Key succession planning considerations for employees or management with significant growth share holdings: (1) Make a will that specifically addresses the growth shares — including guidance for executors on company valuation, BPR claims, and the shareholders' agreement. (2) Check the shareholders' agreement and articles: most PE-backed or professionally structured companies have leaver provisions — growth shares are typically subject to good-leaver/bad-leaver provisions on cessation of employment, and drag/tag-along provisions on exit. Death typically triggers good-leaver status — the shares may need to be offered back to the company or other shareholders at OMV. A compulsory buyback at OMV on death = binding sale contract (s113 IHTA 1984) = BPR unavailable. A cross-option (optional buyback) preserves BPR. Review leaver and buyback provisions with a corporate solicitor. (3) Life insurance in trust: where growth shares are expected to generate significant IHT (particularly above the £1m BPR cap), a whole-of-life or key-person policy in trust can fund the IHT. (4) Lifetime transfer to family: gifting growth shares while their value is still low (near the hurdle) is a low-value PET — starting the seven-year clock at minimal IHT cost.
Frequently Asked Questions
Are growth shares included in the IHT estate?
Yes. Growth shares (hurdle shares, alphabet shares, management equity) are personal property in the IHT estate at their open market value on the date of death. The value is assessed using the option pricing approach — the expected value of the shares' rights to proceeds above the hurdle, discounted for risk and time. HMRC SAV scrutinises growth share valuations. Minority discounts may apply (typically 20–35%) where the holding is a minority interest in a private company.
Do growth shares qualify for Business Property Relief for IHT?
Yes — provided the standard BPR conditions are met. Growth shares in an unquoted trading company qualify for 100% BPR under s105(1)(bb) IHTA 1984 if: (1) the shares are unquoted; (2) the company is wholly or mainly trading; (3) the holder owned the shares for at least two years before death; (4) there is no binding sale contract (or compulsory buyback) at date of death. From April 2026, the combined BPR/APR cap limits 100% BPR to the first £1m of qualifying assets; above £1m, only 50% BPR applies.
How are growth shares valued for IHT?
HMRC SAV uses an option pricing approach (similar to Black-Scholes) for growth shares — treating them as a call option on the company's equity above the hurdle value. The valuation involves estimating the company's enterprise value (using earnings multiples or comparable transactions), projecting the probability of the company exceeding the hurdle, and discounting the expected growth share proceeds to present value. Minority discounts (typically 20–35%) may apply. Executors should commission a specialist private company growth share valuer to produce a defensible HMRC SAV submission.
What happens to growth shares when someone dies under a PE-backed shareholders' agreement?
Growth shares in PE-backed companies are typically subject to leaver provisions. On death, good-leaver status applies in most agreements — the shares pass to the estate. However, compulsory buyback provisions (the company or PE house can require the estate to sell the shares at OMV) constitute a binding sale contract under s113 IHTA 1984 — destroying BPR. A cross-option (the estate or the company/shareholders each have an option to sell/buy, but neither is compelled) preserves BPR. Review the shareholders' agreement with a corporate solicitor to understand the leaver provisions and their BPR implications.
Should I give away growth shares before they become valuable?
Gifting growth shares when their value is still low (near or at the hurdle — where the shares have little intrinsic value) is a low-value PET — the IHT clock starts at minimal tax cost. As the company grows and the growth shares become valuable, the early PET may be (partially) outside the seven-year window. If the donor survives seven years, the gift is fully exempt. If not, taper relief applies after three years. The CGT on the gift (at market value at date of transfer) is also low while the shares are near the hurdle. This makes early gifting of growth shares a potentially efficient IHT strategy — but it must be done before the company's value significantly exceeds the hurdle.
Update Your Will for Complex Share Holdings
Growth shares, shareholders' agreements, and leaver provisions all need clear provision in your will. Executors need to understand the company, the BPR position, and the valuation approach. WillSafe will kits for England and Wales provide a legally valid foundation — with guidance on how to address complex asset holdings.
View Will Kits from £39.99