Using a family investment company is an inheritance tax (IHT) strategy for individuals with large estates subject to IHT.
An individual subscribes for shares in a company, although it won’t be a trading company.
The company’s profits will be subject to corporation tax.
Control can be exercised through carefully drafted articles of association.
When to use a family investment company
Individuals with large inheritance tax (IHT) estates might consider using a family investment company as part of an IHT planning strategy.
How might such a strategy work?
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 (the company couldn’t apply for a life assurance contract due to a lack of insurable interest, but it 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.
The 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).
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 property relief 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 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 the dividend tax allowance to advantage
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.