Equal shares, unequal roles: the Okonkwo succession
Chief Mrs Okonkwo (68) is a widow with two adult children. Her manufacturing business is valued at ₦120m; Ngozi, her daughter, has run it for 12 years and holds no shares. Chidi, her son, lives abroad and wants cash. Other assets are a property worth ₦60m, investments ₦30m and cash ₦10m. Her will leaves everything equally between the children. Assume inheritance tax is 10% on the estate above a ₦30m nil-rate threshold; trading business assets qualify for 50% relief; lifetime gifts are potentially exempt if she survives seven years, with a ₦2m annual exemption; capital gains tax is 10%. The business needs ₦15m of new machinery next year. Chief Mrs Okonkwo wants fairness between her children, business continuity, and to minimise tax. She has made no lifetime gifts and has no life insurance. She asks whether her will achieves these goals.
1. Quantify the inheritance-tax liability under the current will and explain the liquidity and succession problems.
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Inheritance tax calculation
- Business: ₦120m less 50% relief = ₦60m chargeable.
- Other assets: property ₦60m + investments ₦30m + cash ₦10m = ₦100m.
- Total chargeable estate: ₦60m + ₦100m = ₦160m.
- Less nil-rate threshold ₦30m = ₦130m taxable.
- Tax at 10% = ₦13m.
Liquidity
Cash and investments total ₦40m, so the tax is payable in principle. But the will gives each child 50% of the ₦220m gross estate, i.e. ₦110m each. Chidi wants cash. Ngozi has no shares and no personal funds to buy him out. Paying Chidi ₦110m would require selling the business, the property or both, defeating continuity. The business also needs ₦15m for machinery, competing with any distribution.
Succession
Ngozi runs the business but has no legal ownership or control. On death, the shares pass equally to both children. Chidi could force a sale or block decisions. The business may lose key customers and staff. The will is therefore fair in value but not effective in succession or liquidity.
2. Evaluate two planning steps: lifetime gifting of ₦20m of shares to Ngozi now, and a will trust giving Ngozi the business shares with a cash equivalent to Chidi.
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Gift of ₦20m of shares to Ngozi
- The gift is a potentially exempt transfer. If Mrs Okonkwo survives seven years, it falls outside the estate. If she dies within seven years, taper relief may reduce the tax but the gift still uses nil-rate band.
- Use the ₦2m annual exemption, leaving ₦18m potentially exempt.
- Inheritance-tax saving if the gift becomes exempt: ₦20m × 50% relief × 10% = ₦1m. The saving is modest because business relief already halves the chargeable value.
- Capital gains tax: a gift of shares is a disposal at market value. Without holdover relief, the gain could be taxed at 10%. Check the base cost and whether entrepreneurs' relief or gift relief applies.
- Control: Ngozi obtains voting shares and a stake in the business, which supports succession.
Will trust: business to Ngozi, cash equivalent to Chidi
- This can give Ngozi control while equalising value. But the comparison must be on net value after relief and tax, not headline value. Chidi should receive assets of equivalent benefit, including the tax burden.
- A trust can provide flexibility and protect against Chidi's creditors or divorce, but it adds cost and complexity. It must be drafted by a solicitor and reviewed for perpetuities and trustee powers.
- Fairness is not the same as identical assets. The family should agree a valuation method and a buy-out mechanism.
Recommendation: use a combination - gift some shares now, put the remaining business shares into a suitable trust for Ngozi, and leave liquid assets or a life-insurance payout to Chidi to equalise. Do not let tax relief alone drive the split.
3. What should the adviser do about the machinery funding and family communication?
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Machinery funding
Do not use the estate plan to solve a commercial cash-flow problem. The ₦15m should be funded by the business through asset finance, a bank loan or retained profits, not by Mrs Okonkwo extracting cash and weakening the estate. Compare the after-tax cost of debt with the loss of liquidity. If the business cannot service debt, the succession plan is built on a fragile base.
Family communication
Hold a facilitated family meeting with both children. Explain the valuation, the 50% business relief, the ₦13m tax exposure and the need for Chidi to receive equivalent value without forcing a sale. Ask Chidi what 'cash' means - immediate cash, income, or a secured buy-out over time. Ask Ngozi what control she needs.
Governance
Put a shareholders' agreement or buy-sell arrangement in place, funded by key-person or share-protection insurance. Set a valuation formula and a dispute-resolution clause. The adviser should document that legal and tax advice was taken, avoid giving legal advice personally, and record the client's wishes. Review the will and trust every three years and after any gift.