We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
06 May 2021
Previously, if people wanted to pass wealth to their children (often prompted by the prospect of ultimately paying inheritance tax if they did not), they would use trusts because then they could keep the assets under their control. More than a decade ago, the government made that option no longer viable for most UK-based individuals by:
For families with assets eligible for relief from inheritance tax – a trading business, a farm or 'risky' investments such as AIM and EIS shares – trusts are still useful, but not so for those holding traditional investments or cash.
If, for whatever reason, a trust or a simple outright gift to children is inappropriate, what are the alternatives? Some years ago, much was made of so-called 'family limited partnerships' and while they remain the right vehicle for some, they are appropriate only for those with at least £10 million to spare because of the financial regulations to which they are subject. Enter the family investment company.(1)
A very simple example of a family investment company is as follows.
The parents create the company and fund it with cash. They are the directors and the holders of all of the voting shares, and their children are given a non-voting share each. That means that if one of the children needs money, the parents can declare a dividend in their favour.
The parents are in complete control of the company, but they have reduced their taxable estates because their shares carry no economic rights, only voting rights. There is a further degree of protection because, while the children hold shares outright, the articles can from the outset prohibit the transfer of shares to anyone who is not a descendant of the parents.
In due course – for instance, when the children are in secure relationships and sufficiently responsible – the parents can bring them onto the board and give them voting shares.
The parents have, therefore, reduced their taxable estates by shifting value to the children, but without handing over control.
In addition, family investment companies are increasingly attractive thanks to their favourable tax status:
All of the above makes family investment companies appealing. However, there are some limitations:
The above example is a simple one, suitable for the family in question. No two families are the same, and for another a more complicated entity might be suitable.
For further information on this topic please contact Guy Abrahams at Forsters LLP by telephone (+44 20 7863 833) or email (firstname.lastname@example.org). The Forsters LLP website can be accessed at www.forsters.co.uk.
(1) Although this article is written from a UK perspective, family investment companies can be just as useful for international clients; a trust is not always the right vehicle and not every family feels comfortable involving a professional trust company.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.