03 August 2021

How to structure your family company


Expansion & Improvement

Once your business gets to a certain level of success and stability, it’s always a good idea to think about the future – the future of the company, but also the future of your family and how this will link in with the course of the business. Setting up a family company structure is one way to protect your personal and family interests, while planning for the wealth and tax implications.

Daniel Morgan outlines the ways that a family company structure adds flexibility for your business and family interests, while also adding a certain level of security for your finances.


Thinking about the future of your business and family

The initial start-up phase is the point at which you want to start thinking about the future and getting your goals pinned down early. Do you want your children involved in the business at a later date? Do you need flexibility built into the structure for future generations?

Further down the line, once there’s value in the company shares, putting this kind of family company structure in place becomes a lot more difficult.

When you’re setting up a business you’ll have limited cash available to set up this structure. But what you can do is start thinking about your intended goals are alongside your structuring and planning, so you’re starting to set the right foundations.


The benefits of creating a new entity within the business

One option is to set up a trading company that’s owned by yourself and your partner, then have a new company over this in the business structure that has some shares in it.

Having a company that sits above the main trading entity means you can create a family investment company, if you want to. When you want to take cash out of the business for a specific purpose, you can do this. It might be that you take money out to purchase a buy-to-let property or to set up a share portfolio. Any dividends you take out of the main business can then be paid into this separate company, giving you more options for how you then utilise this capital.

If you’re thinking about property or shares, you absolutely need this structure in place to keep things flexible and tax efficient. There’s a minimal admin fee to keep the second company running, but it delivers a real benefit in the longer term.

If you take a £100k dividend as an additional rate taxpayer for personal use, you lose over £38k of that money in income tax. By moving it as dividends to your family company you save that tax cost and do more with the money.


The value of talking to an experienced adviser

Business owners are sometimes not aware of the benefits that a family company could have for them. It's vital to talk to the right advisers and to see what options are on the table.

A good adviser helps you to understand the available options and to put the right planning and structures in place to mitigate your tax costs.

For example:

  • Setting the right structure from the start – setting up a family company structure at a later stage can be done, but it’s complex and takes more time and money. It’s much better to do it early and to start putting the right structures in place from the beginning.
  • Creating a family trust – having a trust as part of the family company allows you to name a beneficiary class, so that shares can be passed on to your children once they’re old enough to receive them. You become the trustee and can decide what happens with shares and funds in the future.
  • Planning for the future – an adviser will help you to think about the future and make your family company as flexible as possible. You don’t have to get your kids involved in the business, but with the right structure in place then you can if you want to. Having that flexibility built into the company structure will be invaluable in the years to come.
  • Making your children shareholders – for younger owners, even if you don’t want a company above the main one, you can at least look at making your kids shareholders. Youl could save lots of tax and it will really help to have this flexibility as your kids get older and your end goals and plans change.
  • Paying your children a dividend – when the kids go to university, you have the option to pay them a dividend from the company. Around £15k tax free can be paid from the company to cover fees and uni accommodation, with the money coming out of the family company.
  • Considering business assets disposal relief (BADR)business assets disposal relief is something else to think about. You would want to own most of the shares in your name under the old entrepreneurs’ relief (ER), as it was. But under BADR, there’s now a £1m limit and you may well use that up in shares fairly quickly. By spreading share ownership through the family company, you might qualify for substantial shareholding relief, with that flexibility available through your structure.

Planning ahead and flexing for the future

As advisers, we need to know your plan. Once we know your goals and your underlying business plan, we can help you achieve what you want to achieve. Even having one family company above the main company gives you so many more options.

Younger people are likely to go for a simple set-up. Wealthier, older people, with more family interests, will go for a more complex set-up. Over time, things will inevitably get more complicated as your family grows and more interests have to be accounted for.

Shareholder agreements, gifting money and writing a will all serve to add to the complexity. And the needs of the business and family can change a lot over time. Because of this, your family company structure needs to be reviewed at least every five years. But as you get older, or your kids get closer to 18, you need to review things more frequently.

Intentions change, families change, relationships change. Your aim is to make the structure fit your current reality and to plan ahead with as much foresight as possible.


Helping you create the ideal family company structure

At Haines Watts Esher, we specialise in working with owner-managers, so advising on a complex mix of business, personal and family issues is second nature to us.

When we look at your family company structure, that will usually mean sitting down for a chat with you, and introduce use to a financial adviser (FA). That way we can look at the financial and tax structuring elements, but also at life assurance, cover, pensions and other things where an FA is best positioned to advise you.

Having that family company above your main trading company is the key. It acts like having a water butt to collect your rainwater – you store your excess cash and have it saved somewhere useful to use when you really need it. Your capital can be extracted into the family company and kept there to make use of as and when it’s required.


If you’d like to review your family company options, please do get in touch with us.