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Inheritance Tax Planning - Rise of the FICs

Inheritance Tax Planning - Rise of the FICs

With a stagnant nil rate band and rising house prices, inheritance tax (IHT) receipts have doubled since 2010. Many individuals are looking for ways to save IHT.

How can I save IHT?

Going ski-ing (spending the kids’ inheritance) is one way to save IHT, but if you want to pass your wealth on to future generations the simplest way is to give away cash and assets. If the person making the gift survives for 7 years, the gift is tax free.

But I don’t want the kids running wild. What about a trust or other way to control the money?

Trusts have had their fair share of tax changes over the years with the changes in 2006 being the most significant. At the beginning of November a further consultation was launched on the taxation of trusts, the stated principles being that the government believes transparency, fairness and simplicity should underpin the taxation of trusts.

This couldn’t be said of the tax rules around trusts at the moment. Although thought of by many as a vehicle for avoiding tax, trusts are actually more commonly used for asset protection purposes, such as stopping the kids running wild.

How are trusts taxed?

Since 2006 the majority of trusts have been subject to IHT charges on entry and every 10 years thereafter. The use of trusts has seen a decline as a result. The consultation states that the tax system should not disincentivise the use of trusts and it will be interesting to see the eventual outcome. However, given the rapid increase in inheritance tax receipts over recent years, it would be very unlikely for inheritance tax charges to be reduced.

Are there other options that save IHT but retain control?

Family Investment Companies (FICs) are one such alternative.

What is a FIC?

A FIC is ordinarily constituted as a private company limited by shares. The directors and the shareholders are generally individual family members.  It is operated as any company would and may even take on employees and directors outwith the family. 

The appeal of a FIC is it allows the founding member to pass on wealth to family members whilst retaining control over how and when it is distributed.  It also gives the founder an opportunity to impart experience and be left with the peace of mind knowing their children (and grandchildren) will continue the business after they are gone.

A FIC is a very flexible structure.  Commonly different sets of shares will be created with the founder retaining a minority but controlling shareholding.  The other shareholdings which carry the economic value are then gifted to family members. This can allow the founder to pass control over time.

Different classes of shares means that the shareholders can receive the benefit of the profits at different times and at different amounts (i.e. declaring dividends to one class of shareholder and not the others) or shareholders can have varying rights to capital on a winding up. For example, those family members involved in running the business of the FIC may be given a preferential right on their shares to reflect their contribution.

What are the tax benefits of a FIC?

There are no ongoing IHT charges. The initial gift of the shares has no further IHT consequences providing the founder survives for 7 years after making the gift.

There are other tax benefits too. A FIC can be more tax efficient than a trust for income tax purposes too.  FICs can accumulate profit with the benefit of the UK’s low corporation tax rates (currently 19% and set to reduce even further to 17% in 2020) compared to trust income tax rates which can be up to 45%.

This all sounds very complicated – is it?

Whilst fundamentally the FIC is a traditional company, care needs to be taken in how these arrangements are put in place.  There are various potential pitfalls that can undermine the IHT benefits if the structure and rights are not constructed properly.  It is vital that you speak to tax and legal advisers who are experienced in these matters to ensure the right structure is tailored to your personal circumstances. Any Wills and Powers of Attorney in place should also be reviewed to ensure they work with the FIC structure.

In setting up a FIC it is important to have all these aspects align and this is where we have the expertise to act on your behalf. Irrespective of the outcome of the consultation on the taxation of trusts, the FIC is a flexible modern form of succession planning and will meet many clients’ needs for the foreseeable future.

By Claire E Macpherson - Director, Private Capital, Robert Burns - Partner, Corporate Finance and Louisa Boyack - Associate, Corporate Finance

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ChrisA