For many people, a trust is the most tax favourable vehicle that enable them to pass assets out of their estate for Inheritance tax (“IHT”) purposes, but with unfavourable changes to the trust tax rules, this has made trusts less attractive nowadays.
The alternative is family investment companies (“FICs”). FICs are private limited companies whose shareholders are family members. A FIC structure enables parents to pass down wealth and /or make generous gifts to the younger generation such as their children whilst remaining in control over the assets/company without an immediate inheritance tax charge.
The advantage of setting up FICs is that all or most of the voting control sits with the parents but the future growth in value of its shares accrues to the children. Alternatively, the parents could settle the shares or cash into a trust and use that cash to subscribe for shares for the benefit of their children. Provided the parents survive seven years from setting up the FICs, most of the value contained within the FICs would not form part of their estate for IHT purposes.
The other tax advantage of FICs is that investment returns will be taxed under the corporation tax regime instead of the personal tax regime. This means that a company will be paying corporation tax at 19% instead of paying at the highest personal tax rates of 45% (38.1% for dividends). In addition, most dividend income received by companies is not taxable at all unless the shareholders are extracting funds from the company.
The best structure for the family needs to be considered carefully and established in the correct way. Contact us if you wish to discuss FICs further or would like to explore any Inheritance tax planning which can be beneficial.