Using a Family Investment CompanyThursday, 17th September 2020
As a Senior Tax Manager, Robert works across all levels of the business to aid and abet the delivery of tax advice across ETC’s broad and varied client base. He has a particular interest in the tax affairs of owner managed businesses and the personal affairs of the company shareholders, including profit extraction, exit planning and family wealth preservation.
The Family Investment Company is becoming a popular mechanism for preserving, maintain and growing family income and wealth due to the relative flexibility it offers over the more traditional trust structures. Importantly though, this is not a ‘one size fits all’ solution. In order to determine if this is a suitable option requires careful consultation with an interested client given that a) the structure can be amended to suit the needs of the family; and b) other opportunities are available depending on the background, aims and specific facts.
The Family Investment Company carries an air of mystery and is difficult to define – this is because there is no one definition. Quite simply, a Family Investment Company is a company which has been specifically set up and adapted with the purpose of carrying out a family’s long-term wealth and / or succession objectives.
This is achieved by tailoring the funding, articles and shareholding of the company to the family’s specific objectives – this can be as simple, or as complex, as necessary.
How is a Family Investment Company Set Up?
A family investment company will usually be funded by either:
- Loaning cash or selling assets to the company;
- Subscribing for preference shares in the company; and / or
- Incorporating an existing investment business
The parents will typically be the directors of the company and hold voting shares, and therefore retain control over the company and its assets.
Further classes of shares can be created and issued to other family members with certain restrictions on, say, voting rights, thus maintaining the original assets holders’ right of control.
In particular, it is not uncommon for children, or trusts for the benefit of children, to acquire shares which are entitled to the future growth in value of the company – this provides a potentially attractive IHT & Succession advantage as any growth in the value of the company accrues outside of the parents estate.
Depending on the specific objectives, income generated within the company could be paid out as dividends to children to help pay for university costs and / or provide a supplementary income. Usually though, where cash or assets are transferred to the company by the parents, repayments of the corresponding loan account may be made out of company profits tax free.
The family investment company could also invest funds to support the pursuance of a commercial venture by family members – for instance, if a child wanted to access funds to support the growth of a rental business, the company could enter into a partnership with that child.
Advantages of Using a Family Investment Company
The potential circumstances in which a family investment company can be used are very broad and this can be tailored to any specific scenarios. However, to summary the key advantages:
- Parents can retain control over the wealth and income of the family investment company
- Children can be provided with value during the parents’ lifetime with certain restrictions
- The assets within the company could be used to provide a supplementary income (tax efficiently) to children in university and / or help pay for wedding costs or other family events
- The company can provide an income stream to family members or access to capital for a commercial venture
- A family investment company can protect family wealth from personal creditors and / or on divorce
Homer and Marge Simpson set up a new UK company called Simpson Investments Ltd – this entity will act as the family investment company.
They fund the new entity with cash in the form of:
- Interest or interest free loans; and
- Subscribing for shares
Any such funding will not be a transfer of value for inheritance tax purposes. In addition, the contributed funds can be extracted by the Simpson’s in the future free of any income tax.
Non-voting shares are then created and gifted to their children, Bart, Lisa and Maggie. The shares given to the children entitle them to a share of any future growth in the value of the company. Importantly then, the shares gifted are of limited value initially as there has been no growth in value, and therefore the gift attracts minimal tax implications.
Any growth in value therefore accrues directly to the children and is sheltered from IHT on the death of Homer and Marge.
The children are in university, and therefore may be considered to be ‘prodigal’ by some. The children are able to access a dividend from the company, which is subject to their own personal allowance and dividend allowance, instead of being funded directly by the bank of mum and dad on income which has been taxed at rate of up to 45%. Mum and dad though are fully in control over how much (if any) dividend is to be paid.
The above is a simple example of what could be achieved by using a Family Investment Company. However, no two cases are the same and advice should be obtained which is tailored to your specific goals and objectives.