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.
Challenges
The 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).
Parents run a profitable pharmacy business. Their son also runs his own pharmacy company and often acted as locum to his parent's business. The parents wanted to retire but were keen to retain the business for the benefit of the family while securing funds for their retirement. The obvious solution was to sell the business to the son who was keen to expand his business.
The primary challenge was to find a way to facilitate the sale of the business to the son, given that the son did not have personal funds to buy his parents business direct.
A company purchase of own shares was considered but this would mean that the son would have to become a shareholder in the existing company to leave him as the sole shareholder. Commercially it was better for the son’s company to acquire the shares held by his parent creating a group structure. Funds could be paid up by way of dividend to pay the consideration to the parents.
Given the connection between the parties it was felt that a tax clearance was needed to avoid income tax under transactions in securities and this was obtained.
The transaction was undertaken achieving the aims of the family. The parents were able to claim business asset disposal relief on the share sale so the gain was taxed at a 10% rate. The only other tax cost was stamp duty on the acquisition of shares.
A family company with two subsidiary companies predominantly involved with property investments. One subsidiary was however a trading company. The group had a value of around £4m of which investments amounted to £2.8m, making the shares held in the holding company ineligible for business asset disposal relief or business property relief. The latter was an issue for elderly parents who held a 58% stake and who wanted to pass assets to their children who worked in the business.
The aim was to pass the trading side of the group to the two children while gifting away as much of the investment side to mitigate potential inheritance tax. The challenge was to find a way to achieve this that suited the families wishes without triggering significant tax and ensuring that commercially the trade remaining intact within the current subsidiary.
The solution was to extract the trading subsidiary from the group by way of a capital reduction demerger so that all the shareholders held the same proportion of shares albeit in a new wholly trading group. This would then allow the parents to gift their shares to the children in the new trading group and claim CGT hold-over gift relief.
Shares held in the remaining investment group could in part be gifted into trust using available nil rate bands for IHT and holding over capital gains tax.
The steps involved the following:
Formation of a new holding company share for share to create sufficient capital in order to carry out the demerger.
Moving assets within the group on a tax neutral basis to facilitate the demerger of the trading subsidiary.
A reduction of share capital equal to the value of the trading subsidiary in exchange for the transfer of shares in that subsidiary to a newly formed standalone company, which issued shares to the same shareholders in the same proportion as they held via the holding company.
Tax clearances were obtained for corporation tax, capital gains tax, income tax and stamp duty arising from the transaction.
Subsequent gifts of shares were undertaken post demerge to achieve what the family wanted and as a result the steps would save the parents around £420k in potential IHT with minimal tax cost.
Very profitable company operated in a niche market with one major customer, it had built up a large cash balance. As the business operated from rented accommodation the owners felt it was the right time to use the cash to acquire their own premises but were nervous about having all their assets in one company operating an unpredictable trade.
Challenge
Extracting the cash from the company without having to pay tax. Creating a structure which offered protection in terms of the holding of the property going forward.
Create a new holding company and form a group above the existing trading company. Cash could then flow between companies without incurring a tax liabilities to allow the holding company to purchase the trading property.
Tax clearances and stamp duty relief were obtained in respect of the new share structure which mirrored the structure in the trading company.
The required structure was established with no tax cost and the use of the cash reduced the risk that HMRC could argue that the company was no longer a trading company.
A family run property investment company with a portfolio worth around £3.5m mainly consisting of residential property. Mother and father owned the majority of shares but wanted to step back allowing their adult sons, who were both very active in the business, to take over.
A proportion of the shares in the company were also held in trust for the two sons as beneficiaries. Appointing these out would be a way of reducing the parents’ stake in the business which would mitigate their IHT exposure while providing a longer term opportunity for the sons to take control of their own parts of the business.
Each son had their own ideas on what property to invest in for the future and the challenge was to find a way to give them their own stake in the business independently, in which they could run but without triggering significant tax charges.
The solution involved carving the portfolio into three equal shares and transferring these down to three newly formed subsidiaries in exchange for shares.
The following steps were then implemented:
the rights in the shares held by the sons were altered to give them full rights over one particular subsidiary only
a liquidation demerger under s 110 IA 1986 was undertaken whereby the holding company was placed into members voluntary liquidation. The shares in each subsidiary were distributed to three new stand-alone companies in exchange for further shares
at the end of the process all the shareholders held the same proportion of shares in each new holding company as before and the son’s rights mirrored those in the original company
post demerger each son’s shares which carry no rights were bought back for a nominal sum leaving one son as a shareholder in a new holding company along with their parents
the platform was created for each son to run their own portfolio and ultimately take control.
Tax clearances were obtained for corporation tax, capital gains tax, income tax and stamp duty arising from the transaction. The tax clearances obtained ensured that there were no chargeable gains despite the fact that the steps ensured an uplift in the base cost for tax purposes, to market value of each property transferred.
Splitting the portfolio in this way giving each son the opportunity to control and grow their own portfolio was achieved without crystalising any tax charges.
