Keeping It In The Family
Individuals who wish to pass down substantial wealth by making a lifetime gift are often reluctant to do so particularly to relatively young people because of the fear that family money will be frittered away. Traditionally, a trust has been used to protect assets gifted in this way but the use of trusts for inheritance tax (“IHT”) planning has been severely restricted by the imposition of adverse tax charges. For this reason, those wishing to pass down substantial wealth should consider using a family investment company (“FIC”).
An FIC is an ordinary limited liability company. The shareholders are family members the individual (“the Donor”) intends to benefit. Any amount of cash can be transferred into the company tax free. Shares in the FIC can then be given to the intended beneficiary for example children or grandchildren with no immediate charge to IHT. Provided the Donor survives for seven years, there are no further IHT implications but if he or she dies within seven years of making the gift, what is known as “taper relief” will apply reducing the IHT liability by a percentage depending upon how many years have elapsed since the gift.
Control is typically retained by the Donor being a director of the company and the Articles of Association being drafted to give the shareholder beneficiaries restricted voting rights.
The FIC pays corporation tax at the rate of 20% on the profits it generates. The shareholder beneficiaries may receive income by way of dividends if declared and only pay income tax to the extent the company distributes income. If shareholders do not have a personal income in excess of the basic rate band, dividends will not attract an income tax liability. There are also other ways of beneficiaries accessing capital in a tax efficient manner.
With corporation tax at favourable rates, an FIC may be an attractive alternative to using a trust. The donor retains control over the money gifted while avoiding an immediate charge to IHT and provided the Donor survives for seven years from making the gift it falls out of the IHT net completely.
For specific advice regarding Estate Planning, Talk to Tollers call us on 01604 258558