UK: Family Investment Companies – Succession Planning: An Alternative To Trusts

Last Updated: 14 November 2017
Article by Terence Pay

When carrying out succession planning in the UK, lifetime gifts can be an important part of an individual's tax planning. However, where an outright gift of assets is made, the donor will relinquish all form of control over those assets, as well as the rights to any income arising from those assets. Individuals with substantial wealth may not wish for their beneficiaries to have uncontrolled access to high value assets or sums of money, particularly if they are young or vulnerable.

For these reasons, trusts have often been the preferred structure used by families to pass wealth on to future generations in a controlled and tax-efficient manner. However, a disadvantage of trusts is that they are not recognised in many jurisdictions and the tax treatment can be uncertain. This may be a particular concern for international families with children and grandchildren resident in several different countries. In the UK, over recent years, the tax treatment of offshore trusts (generally suitable for non-domiciled settlors) has become increasingly complex, whilst many domiciled settlors face an immediate inheritance tax charge of 20% on the settlement of assets; hence, many families are seeking alternative solutions.

A Family Investment Company can offer a simpler alternative to a trust structure and it is becoming increasingly common in succession planning. When structured correctly, a family investment company can allow assets to be passed down to future generations tax efficiently whilst at the same time allowing the taxpayer to retain control over those assets.

An additional attraction is that a company structure is familiar to most people and the tax treatment of companies and their shareholders tends to be well-established in most jurisdictions.

Creating a Family Investment Company

Usually, the parents would form a company with different classes of shares, e.g. 'A' and 'B' shares, which would carry different rights. For example, the 'A' shares would carry the economic rights (i.e. rights to dividends and distribution of assets on the winding up of the company) and the 'B' shares would carry the voting rights (and perhaps other controlling rights, such as the ability to appoint directors). The 'A' shares could be designed to provide incremental rights (i.e. rights that increase over time) to the future capital and income of the company if so desired, but would not carry voting rights.

In a typical scenario, the parents would hold the 'B' shares and the children would have the 'A' shares. Depending on the circumstances, grandchildren could also be given 'A' shares.

The 'B' shares allow the parents to retain control over the company (for example, in respect of the investment decisions, dividend policy, sale of assets etc.), but the rights to income and capital would be given to the children. Usually, restrictions would be included in the Articles of Association to prevent the 'A' shares from being sold or transferred to third parties, which is particularly important for asset protection purposes, including in the event of a divorce.

The Articles of Association (and possibly a Shareholder Agreement) would need to be carefully drafted in order to put in place the required rights and restrictions. It may also be helpful for professional valuations to be obtained in relation to the respective values of each share class.

The parents would usually inject cash into the company in exchange for shares and the company would acquire investments. The parents could transfer assets into the company, but this may give rise to a capital gains tax charge for the parents so professional advice would need to be taken. It would not normally be suitable to transfer UK real estate to the company as this would usually give rise to a Stamp Duty Land Tax charge.

Inheritance Tax

Shares in an investment company do not qualify for Business Property Relief (BPR). The gift of the 'A' shares to the children is a potentially exempt transfer (PET) for UK inheritance tax purposes and would only become chargeable to inheritance tax if the donor passes away within seven years of the gift.

Care needs to be taken to ensure that sufficient value is transferred to the children in order for the transaction to be effective for IHT purposes. The value of the economic rights transferred (which will, to some extent, depend on the extent of restrictions placed on the 'A' shares) needs to be balanced against the level of control the 'B' shares provide, as the greater the rights that are allocated to the 'B' shares that are retained by the parents, the higher their value is likely to be, and the lower the value of the 'A' shares that are transferred.

Corporation Tax

Income arising from the assets held by the company will be subject to corporation tax at 19% (assuming a UK company). This compares favourably to the personal income tax rates that would otherwise apply (up to 45%) if the income were received directly by the children (if UK resident).

Any capital gains realised by the company would also be subject to corporation tax at 19% if the company is UK resident, with the benefit of indexation relief.

Different considerations apply where the company is non-UK resident and specific advice should be taken to determine the income tax and capital gains tax treatment for the shareholders.

Dividends

There is no withholding tax on dividends paid by a UK company.

The dividend income will be liable to UK income tax in the hands of a UK resident, although the tax rates for dividend income are lower than the standard rates of income tax (7.5% at the basic rate, 32.5% at the higher rate and 38.1% at the additional rate). Dividend income received by a minor child will generally be taxable on the parent.

As the company profits that are used to pay the dividend income will have been subject to corporation tax in the UK, there is an element of double taxation in respect of those profits.

For non-UK resident shareholders, the tax position on the dividend income will depend on the rules in their country of residence.

Existing Companies

Where there is an existing investment company, the shares can be restructured in a similar way and the 'A' shares gifted to the next generation. The capital gains tax position will need to be examined, as the disposal of shares may give rise to a UK CGT charge of up to 20% on the deemed gain. If the company is non-UK resident, the CGT position will depend on the donor's domicile status. If the donor is not domiciled or deemed domiciled in the UK, the gain arising on the disposal of the shares may be taxable on the remittance basis.

Summary

Family investment companies offer a suitable alternative to trusts when carrying out succession planning. Use of a company structure can allow assets to be transferred to the next generation in a tax efficient manner whilst at the same time providing a mechanism for protection of those assets from vulnerable or profligate family members, or in the event of a family member divorcing.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Terence Pay
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.