Family wealth planning - HOW BEST TO PASS ON ASSETS WITHOUT UNFETTERED ACCESS?
Published: 08 Nov 2021
The ongoing pandemic has led to a focus of our clients’ minds on how best to prepare for a transfer of assets to the next generation, involving, educating, and empowering the family in the family investments or business.
Several options are available to protect against an outright gift of wealth for those seeking to pass assets to the next generation while considering inheritance tax efficiencies. The key routes being to either create a family trust or to establish a family company.
The transfer of assets into a family trust is a tried and tested mechanism for ensuring the benefit of the family wealth is gifted to the younger family members, without giving unfettered access to the underlying assets. Control is centred with the Trustees who protect and administer the assets (and in certain instances, the income from those assets) for the benefit of the ultimate beneficiaries, being the children and grandchildren.
An alternative is to consider a family company which may provide a more tax efficient landscape with similar flexibility. In addition, one advantage is that the corporate structure is a framework which is familiar to many. The aim being to provide the children with the shares that hold the growth value, while retaining control mechanisms for the older generation by way of directorships, voting rights and preferential share classes.
The structure is best utilised where funds are retained within the corporate, minimising the double taxation charge where profits are extracted annually. The attractive tax rate for corporates (even given the upcoming raise to 25%), the possible availability of a dividend exemption and the ability to deduct reliefs such as full mortgage interest for rental property, assist in the tax efficient environment.
In order to ensure that the commercial and tax requirements of the family and structure are met, experienced professional advice should be taken at the outset. To provide protection for the family it is important that the company has Articles of Association that befit the circumstances together with a Shareholder’s Agreement to best future proof the structure.
HMRC have recently agreed that there is no correlation between those setting up a Family Investment Company and non-compliant behaviour and their dedicated unit set up to investigate the tax risks associated with FICs has been disbanded.
Although future changes in tax legislation cannot be discounted, FICs are firmly back on the table as a viable planning tool for families wishing to protect their assets across the generations. Given the possibility of a rise in capital gains tax rates due to the current climate, it may now be the moment to transfer assets into a corporate and capture gains at current rates of up to 20%, while considering the inheritance tax implications for the family.