Family Investment Companies vs trusts: Which is right for you?

Family Investment Companies vs trusts: Which is right for you?

No two families are the same. Each is, shaped by varying priorities, values and beliefs. And it’s no different when it comes to wealth management. Ensuring an effective wealth management structure is in place can be just as nuanced as the family it serves.

If you’re thinking about your family’s financial future, chances are that trusts will have sprung to mind. Although trusts offer a wide range of structures, each with their own tax benefits and implications, you may also wish to consider alternative forms of succession planning such as Family Investment Companies (FICs).

Family Investment Companies are a lesser known wealth management tool, but are becoming increasingly popular amongst clients who want to pass down generational wealth whilst keeping more control over how family members handle assets that are invested.

In our last blog we covered 6 key benefits of Family Investment Companies, but how do they compare to trusts, and which is best for you and your family?

 

Passing down wealth: Family Investment Company vs Trusts

Family Investment Companies

Family Investment Companies allow wealth to be inherited in the form of shares within a company. This means that Director Shareholders (for example grandparents) can continue to hold shares and benefit from the assets and profits.

Whilst any increase in value associated with shares that have been gifted will fall outside your estate for Inheritance Tax (IHT), it’s worth noting that the market value of any shares held by you at the date of your death will be subject to Inheritance Tax.

Trusts

When it comes to passing down wealth, trusts allow assets to be settled for the benefit of the beneficiaries (commonly children or grandchildren). This would normally exclude the settlor of the trust. The settled property is removed from your estate, so no Inheritance Tax liability will arise on your death.

Once property is settled in the trust, you as the settlor are not able to benefit from the settled property. If you do receive a benefit, the property will be treated as forming part of your estate for Inheritance Tax purposes, causing the Inheritance Tax benefit of using a trust structure to be lost.

 

Tax saving benefits: Family Investment Companies vs Trusts

Family Investment Companies

• There is no tax impact on initial gift of shares, and if the donor survives more than seven years there will be no Inheritance Tax liability.

• If shares are gifted when value has accrued in the company then a Capital Gains Tax (CGT) charge will arise, there isn’t normally any relief for this gain. Instead of gifting shares, cash could be gifted then invested in the Family Investment Company. There is no Capital Gains Tax on cash gifts.

• Family Investment Companies pay Corporation Tax (CT) at 19% (25% from April 2023) on profits and gains. However, dividend income received by the Family Investment Company will normally be exempt from Tax.

• When income is distributed to shareholders, income tax will be payable at their marginal rate after the Dividend Allowance of £2,000 has been utilised (£1,000 from April 2023).

• Family Investment Companies are not subject to the 10-yearInheritance Tax charge. However, the shareholders will be subject to Inheritance Tax on the value of their shares on death.

Trusts

• On initial settlement there will be an Inheritance Tax charge on amounts above your nil rate band. If you survive more than 7 years, there will be no additional Inheritance Tax liability.
• Normally no Capital Gains Tax liability will arise because ‘hold over’ relief is available.
• Tax is paid at 45% on general income and 39.35% on dividend income by the trustees. The beneficiaries can claim the tax paid back via their personal returns depending on their marginal rate of tax.
• Capital gains tax is payable at 20% (28% if residential property) on anything in excess of the Annual Exemption, currently £6,150.
• Trusts are subject to a 10 yearly Inheritance Tax charge. However, beneficiaries are not subject to Inheritance Tax on their interest in the trust.

 

Who controls what?

Family Investment Companies

Often you, as the donor, will become a director and retain a controlling interest in the Family Investment company. This allows complete control over funds, assets and how the shareholders will benefit. For this reason, a Family Investment Company is more flexible than a Trust, and allows a higher degree of control over your family’s spending.

Trusts

A trust is controlled by trustees, who are responsible for controlling the assets or money placed inside a trust. This means that they will decide who will be a beneficiary and when they will receive those assets or money. All capital and income is distributed completely at the trustee’s discretion.

It should be noted that the trustees can include the settlor, and therefore you are able to retain an element of control. However, you as settlor cannot benefit from the trust.

Setting up the legal structures: Family Investment Companies vs trusts

Family Investment Companies

• Family Investment Companies are companies and therefore must comply with the requirements under Companies Act 2006. Often companies are set up by formation agents who deal with the legal formalities of incorporation.
• Information about a Family Investment Company will be publicly available at Companies House.
• The beneficiaries of a Family Investment Company are limited to the shareholders.

Trusts

• Trusts must comply with the law and require legal expert (ideally a solicitor) who can advise you on important aspects of the trust and will prepare the paperwork required.
• Trusts are private entities and information will not be publicly available.
• Trustees can direct to a wide range of potential beneficiaries and can add more beneficiaries.

 

Advising you on the best structure for your family

Both Family Investment Companies and trusts offer benefits and draw backs which should be considered in detail along with your personal circumstances before deciding on your succession plan. Sometimes a combination of the two offers the most effective model.

No matter what your circumstances are, it’s vital to be aware of how each structure and set up can affect or even improve your wealth management strategy.

Family Investment Companies and Trusts not only require an in-depth process upon setting them up, but need to be reviewed regularly to ensure that they remain in line with the ever changing financial policies and regulations passed through parliament.

Consulting a qualified and experienced advisor will help you untangle the often complicated web of legislation, and ensure that your structure meets your family’s needs. Our team of tax advisors can help you review your options, offering practical advice in line with your wishes, so you can be rest assured that your wealth management is future proof. Speak to a member of our team today.