Steven Mugglestone

The more I learn, the less I know

Family Trusts making way for Family Investment Companies

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Family Trusts making way for Family Investment Companies

After the changes to the taxation of trusts in recent years, family businesses and any planning for succession should consider all the viable options for family wealth and succession planning including alternatives to trusts.

Changes to taxation for trusts

Trusts have traditionally been a basis of family wealth and inheritance tax (IHT) planning, offering wealthy individuals and families the chance to pass assets down generations in a tax-efficient manner.

In recent years, however, there have been significant changes to the taxation of trusts, making them a much less efficient route.  The key points are as follows:

  • The highest rates of income tax and capital gains tax currently apply to most trusts (50% and 28% respectively)
  • Gifts made by individuals to nearly all new trusts will trigger a 20% upfront IHT charge, after the donor’s nil-rate band or IHT threshold has been exceeded.
  • Most trusts fall into the relevant property regime, which means that IHT charges at up to 6% on the value of the trust less reliefs are suffered every 10 years and when assets are disposed.

Trusts still, however, remain popular as they allow individuals to pass wealth down generations without providing access to it at too young an age, and they allow for changes in beneficiaries’ entitlements under the trust without triggering tax charges.

When trust work

Key issues in using UK trusts tax-efficiently is to fund the trust without triggering the immediate 20% IHT charge by considering the following:

  • An individual can gift up to £325,000 (current nil rate band) into a trust every seven years.
  • Excess income can be gifted into trust.
  • Assets qualifying for business property or agricultural property reliefs can be transferred to trust, enabling significant value to pass into trust. This may not reduce the immediate IHT charge to nil unless the asset qualifies for 100% relief on the whole value.
  • Reversionary interest trusts can be used to pass significant sums into trust without an IHT charge, although there is risk to this planning as it seeks to circumvent the legislation.

With these options, UK trusts are likely to remain a key tool in wealth planning. However, there are individuals and families for whom the above options are not available or sufficient to deal with the assets they wish to shelter from IHT.

The alternative to trusts

Current alternative to trusts are, for example, structures like Family Limited Partnership (FLP) or Family Investment Company (FIC).

FIC is simply a private company whose shareholders are members of the same family, and whose memorandum and articles of association can also be drafted to suit the family’s needs.

Similar to a trust, this enables the founder to retain control over family investments, but FICs do not suffer the 20% entry charge or six per cent 10-yearly inheritance tax (IHT) charges applicable to trusts.

Estate planning

In terms of estate planning, FICs have some attractive features.

  • No immediate IHT charges on transfer of property to the FIC, and no on-going 10-yearly IHT charges.
  • Gifts of shares in the FIC to other family members fall outside of the IHT net (providing the donor survives seven years).
  • The donor can gift shares in the FIC up to the value of the available nil rate band into trust without triggering an immediate IHT charge.
  • A share class can be created into which future growth in value of the FIC passes, and these shares can be gifted to a trust or an individual with minimal tax charges.
  • If the donor holds shares on death, IHT will be payable, but the value of the shareholding is discounted to reflect its relative size (for example, minority shareholdings often attract significant discounts).  It is possible, in certain circumstances that no IHT is payable on death.

Tax within the FIC

The FIC is subject to corporation tax – currently a maximum of 26%, falling to 23% by April 2014 – (payable on income and capital gains generally). This tax charge can be mitigated to varying degrees by the fact that UK and most overseas dividends will not be taxable within the FIC, and it will also benefit from an indexation allowance on gains, meaning that only returns above the level of inflation will be taxed.

If profits are to be accumulated within the company, this makes FICs very attractive, as the rate of 26% or less compares favourably with personal and trust income tax rates of up to 50%.

There are two main disadvantages of a FIC from a tax perspective.

  • If capital assets, as opposed to cash, are transferred to the FIC then there may be a capital gains tax (CGT) charge on the transfer, although there are various ways in which this charge might be mitigated and specialist advice should be taken.
  • There is a double tax charge when profits are extracted by shareholders, who may pay further tax of up to 36.11% on dividends – this can be mitigated to some extent


While not offering the same degree of flexibility as a trust, FICs are nevertheless a credible vehicle for holding and passing down family wealth where the 20% trust entry charge cannot be avoided, or in circumstances where it is anticipated that profits are likely to be reinvested within the structure.

Steven Mugglestone BA FCA,
Finance Director Services
McGregors Corporate, Entrepreneurial Chartered Accountants and Business Advisers
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McGregors Corporate are a Member of Probiz Tax, providing Innovative Tax Solutions to Owner Managed Businesses.

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Written by Steven Mugglestone

December 5, 2011 at 10:29 am

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