3 min read 28 Feb 22
Family investment companies can be used by High Net Worth individuals for inheritance tax planning purposes.
Individuals with large inheritance tax (IHT) estates might consider using a family investment company as part of an IHT planning strategy.
The individual subscribes for shares in a company.
Over time the individual gives away shares in the company – presumably to family members.
The company will invest in various financial instruments – shares, OEICs, deposits, capital redemption contracts (life assurance contracts are not be suitable where there is a lack of insurable interest, but the company could conceivably purchase such a contract or receive such a contract in return for the issue of shares). The company could also invest in property – both residential (buy to let) and commercial.
The subscription for shares in the company isn’t a transfer of value. The individual’s estate has not fallen in value – cash has been replaced with shares of the same value.
Outright gifts of shares to family members will be PETs (potentially exempt transfers). It might, in some circumstances, be desirable to have some of the transferred shares held by trustees in which case the transfers would be CLTs (chargeable lifetime transfers) assuming it is not a bare trust.
The gifts of shares in the company will also be disposals for capital gains tax purposes. So it might be appropriate to gift shares shortly after the company is formed. It might also be worthwhile considering the use of trusts to qualify for hold-over relief.
The company will not be a trading company. Hold-over relief for gifts of business assets will not be available.
On the individual’s death any shares in the company still held by the individual will be subject to IHT. Business Relief for IHT purposes will not be available.
There may be a discount in the value of the shares for IHT purposes. It is likely that the value of each share will be less than the net assets divided by the number of shares in issue.
The company could be unlimited. There is little point in limited liability if the company only holds investments and there is no borrowing. Unlimited companies do not have to file accounts with Companies House.
The company’s profits will be subject to corporation tax. Dividend income is corporation tax exempt. Capital gains made by companies may benefit from indexation allowance up to December 2017.
The company will (presumably) pay dividends from time to time. The distribution of dividends can be controlled by having different classes of shares. The recipients of such dividends may be able to use their dividend tax ‘allowance’.
Control can be exercised through carefully drafted articles of association (and through the structure of share capital).
Control could be over:
(a) transfers of shares
(b) payment of dividends
(c) appointment of directors.
There are many possible variations on planning strategies using family investment companies.
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"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc which is a holding company registered in England and Wales with registered number 11444019 and registered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.