Client examples

How we've helped our clients

Example: restructuring for tax efficiency

The family pay around £15,000 to £16,000 less income tax than before the structure was set up, and have potentially saved over £600,000 of inheritance tax, with more savings to come as the portfolio of investments in the FIC grows.

The situation Parents owned a profitable trading company. They took out income of £200,000 between them tax-efficiently annually, but there was a significant cash reserve within the company which only increased each year. They wanted to use the profits to benefit the family tax-efficiently, and also to invest for their family.ChallengesThe main challenge was how to extract the profits from the company without paying any additional tax on dividends, or winding up a successful trading company. Risks included:

If the company continued to accumulate cash, or use that cash to invest, there was a risk that any sale of the shares would not attract Business Asset Disposal Relief in the hands of the shareholders.

If the owners wished to continue running the company and later gift shares within the family, inheritance tax may apply if they died within seven years of the date of the gift.

On any onward transmission of the shares in the company on death it may no longer considered to be a trading company because of the accumulated cash.

Our solution

We set up a Family Investment Company (FIC).The shares of the FIC were set up so that the parents owned the voting shares, and the children held shares with dividend rights (and rights on winding up).

Using a combination of different share rights, and a bespoke shareholder’s agreement and Articles of Association, shares could be passed tax-efficiently to the children.

Outcome

Dividends received from the trading company were reinvested into rental property. Holding property via the company meant that all of the mortgage interest on the rental property was tax-deductible. The company also pays a lower tax rate on the rental income than the parents would if they owned it personally.

As the value of the FIC increased, anything over £1 million passed into the shares owned by the children and the trust. This growth dropped out of the parent’s estate, reducing the parent’s inheritance tax liability by £400,000 to date.

This saving is expected to increase as the investments within the FIC, which include rental property let to a third party, grow. The trading company is also very firmly established to be within both business asset disposal and business property reliefs, creating potential inheritance tax savings of over £800,000 and reducing tax on up to £1 million of gain per parent on sale of their shares by 10% (a potential £100,000 saving each).

The family pay around £15,000 to £16,000 less income tax than before the structure was set up, and have potentially saved over £600,000 of inheritance tax, with more savings to come as the portfolio of investments in the FIC grows.