Have you considered what will happen to your assets when you set sail from this mortal life? In this article, Malcolm Emery, a partner in our private wealth team, looks at the benefits a family investment company (FIC) offers.
Planning for your final voyage
For many decades trusts were the preferred vehicle of choice for estate planning. Trusts became popular because they allowed the creator (known as the settlor) to separate control and economic ownership. Once the trust had been created, the settlor could retain control by appointing themselves as one of the trustees, whilst the economic benefit of the trust would be retained for their family. Providing the correct type of trust was used no immediate tax charges arose.
For various reasons, the popularity of trusts concerned HM Revenue & Customs (HMRC) who implemented an overhaul of the tax rules applying to trusts just over a decade ago. With limited exceptions the creation of a trust now gives rise to an immediate inheritance tax charge.
Not to be defeated, the tax planning fraternity decided it was time for a new wealth preservation vehicle. The objective was to create something that offered the benefits of a trust (i.e. separation of control and economic benefit) but without the added tax complications.
The benefits of using a company are well-known in a business context. However, it soon became apparent that with a bit of modification a company could more or less replicate the benefits of a trust without the tax downside. The FIC was born.
How can an FIC help you?
An FIC works best when cash is used; otherwise immediate tax liabilities will arise.
Once the company is formed you can then decide what to do with it. You could, for example, create different classes of shares owned by individual family members, or possibly trusts created on their behalf. To ensure you remain in control of matters, such as the investment of funds, income distributions and the long-term viability of the company, it is important that you put suitable articles of association in place. These are the documents which govern the company and give you control via your position as a director.
A final thought
Whilst an FIC has its place, a trust may still be a more attractive proposition for you. After all, an FIC is trying to replicate the features and benefits that a trust offers. A trust may be a better solution for you if:
- The amount you are thinking of giving away is within your nil-rate band (currently £325,000); or
- The assets you wish to gift away qualify for either business property relief or agricultural property relief.
The most important thing is that you take good professional advice beforehand to ascertain what the best solution is for your circumstances and requirements.
Malcolm Emery is dual qualified as a chartered tax adviser and solicitor, and is head of private client at Stephens Scown. For further information on FICs or trusts please call 01392 210700 or email email@example.com