UK: Family Investment Companies

Last Updated: 12 September 2011
Article by Howard Bilton

Nobody likes to think about their own mortality. It is a surprising statistic that in the UK two thirds of the population die without leaving a will. I would presume that the figure in similar in other countries. In the majority of cases this is not the biggest problem in the world because there is not much of an estate to bequeath and what there is automatically goes to the next of kin- which, if they should care, is probably exactly in line with their wishes. For wealthier people, as typified by those who play golf or read golfing magazines, this is likely to be a major problem but such persons normally take a little more care over their wealth and how it is passed on.

The alternative to a will is a trust. Trusts can have huge advantages. They allow the distribution of the wealth to be controlled so that children get looked after but do not necessarily get a huge lump sum of cash which might cause them to go party mad and disincentivise them from having a career or job. Frequently wealthy bread winners want their spouse to be well looked after but they do not want to risk the spouse re-marrying and the new partner running off with all the money. They want the bulk of their capital to be preserved for the children or even grandchildren. All this can be achieved through trusts. Setting up a trust also forces the settlor to put his affairs in order early by transferring the assets to the trustees so that on death there is little or nothing to be done thereby saving those left behind the heartache, worry, expense and delays which are necessarily involved in administering an estate. Even a simple estate can cost up to 6% of its value in fees to administer and take a minimum of two years to get sorted. This is not attractive for anybody-apart from the lawyers. Trusts provide a means of avoiding all that.

The disadvantage of a trust is that it involves... well... a level of trust. Assets have to be passed over to trustees and the settlor loses control. In a previous article I wrote about the joys of private trust companies. These provide a method of setting up a trust and retaining a good degree of control. They remain attractive and are being used increasingly by the sophisticated client.

There is another option. This is being increasingly used by UK domiciled persons who are restricted in their ability to transfer assets into trust by the 20% lifetime inheritance tax charge which applies to substantial transfers. These entities will be attractive to a whole range of persons because they are simple and easy to understand and relatively simple to set up and administer. They are known as Family Investment Companies (FICs) in the UK. We also refer to them as common law foundations as they are similar to the civil law foundation found in Lichtenstein and elsewhere but are much easier to understand by those brought up by in a common law system.

FICs are a company. The usual form of a company is limited by shares. A share has three important characteristics being: a)The right to vote and therefore control the company; b)The right to receive income in the form of dividends; c) The right to the capital and the underlying assets owned by the company. Usually a share will carry all three rights but it is quite possible for it to carry only one or two of these three. By splitting the rights and obligations we can create interesting results.

For example, let us assume that Mr. A is an UK national living in Hong Kong. He does not intend to spend the rest of this life in Hong Kong so is almost certainly UK domiciled and subject to UK IHT on his worldwide estate. His first preference would be to pass the assets into trust to avoid UK IHT but he cannot do so as the transfer to the trust would attract the 20% charge. If he gives assets away to another individual seven years before his death then he avoids UK IHT and the 20% charge entirely but that would leave him without assets to look after himself and therefore reliant on his beneficiaries. He would also lose control of those assets. Neither is attractive. Instead we set up an FIC. Mr. A is issued with all the voting shares and therefore keeps total control. He also jointly retains, along with his wife, the income producing shares because although he does not envisage spending the capital he does want to ensure his lifestyle and spend the income. The capital shares can be given away to his wife and children whilst he is in good health. This structure means that all his assets are conveniently bundled together in one package so his executors do not have to try and find them, take control and administer them according to the will. UK IHT is massively reduced as he has given away the capital seven years before death. Clearly the income producing shares do have some value but it is minor compared to the capital shares. Sweet and simple.

This type of structure would be effective for most persons who are in danger of being subject to inheritance tax or estate duty in their home country or anywhere else in the world. There is no estate duty in Hong Kong but just because you are resident in Hong Kong does not mean you are exempt from estate duty everywhere else in the world. Assets are frequently charged to estate duty in their country of location irrespective of who owns them. If they are owned by a company then, because a company never dies, local estate duty is eradicated. Hong Kong residents will often have estate duty considerations in their own county of birth and anywhere they have invested but this type of structure can remove those liabilities.

The structure above will also be of relevance to those who have parents back in their home county with wealth to pass on. We frequently get asked about whether we can help reduce estate duties on their estate. Funnily enough the beneficiaries are often more concerned about this! For those living in the UK a trust is going to be unattractive because of the 20% charge. Giving away assets seven years before death is going to be unattractive because of the reasons I gave above i.e. loss of control and having to rely on relatives for future upkeep. There is nothing to stop a UK resident from setting up one of these structures. For most it will not give income or capital gain tax advantage without further planning but that is not the aim. It is a way of eradicating or considerably reducing estate duties.

The plan can further be refined by using a company limited by guarantee or a company limited by both guarantee and shares. Most people will be familiar with companies limited by guarantee even if they do not know it as this is the basis of most clubs and societies. When you join a club you become a member, rather than a shareholder , of a company limited by guarantee. That membership is retained only for as long as you are alive or for as long as the club (company) committee decides you are worthy and suitable and abide by the club rules. This type of company can be sued as an FIC. Using an FIC avoids the need for a will and probate on the underlying assets as they are all owned by the company. A probate is still required to pass on the voting and income producing shares. So if the votes and income rights are held by members rather than shareholders those rights would expire on the death of the owner and then new members could be elected with those rights thereby transferring them without the need for further procedure and the avoidance of probate entirely. Hybrid companies are able to issue both shares and memberships so the various rights and obligations can be mixed and matched between the two to create whatever result is required and suits the circumstances of the family.

This type of structure is the latest big news in UK estate planning but can be used by anyone anywhere else in the world to good effect. It doesn't remove the need for a will as there will always be personal assets outside the structure but it does provide a convenient and relatively cheap and simple method of dealing with the majority a person's estate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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