Jeremy and Jemima were contemplating their Inheritance Tax potential. They called in their adviser to discuss their options.
Jeremy stated, “We would like to reduce the IHT liability and keep control of our money in case we need it. We don’t want to spoil the kids either. I am sure Jeremy junior would waste it if we gave him cash now.” Jemima continued, “We have a substantial amount of cash available after selling the business and need to do something.” The adviser discussed various options. “You could consider trusts but, generally, you cannot maintain control over the money unless you use a discretionary trust and that would limit you to gifting your nil rate band allowance only, unless you want to pay some IHT now.
Further, you cannot benefit from the trust.” “Well that’s no use” huffed Jeremy. The adviser continued, “We could look at a Family Investment Company.” Jeremy and Jemima looked at each other quizzically. “A FIC can be set up very cheaply and you can gift or lend money to it. If it is a loan you can have it returned when you need it, or take the dividend income the FIC receives as loan repayments, tax free.” “You could gift the kids non-voting shares and you retain voting shares and become the company directors, that way you maintain control. You could provide them with growth shares whilst you retain income bearing shares.” “An added advantage is that company tax rates are very attractive compared with personal tax rates. Corporation tax is 19% and falling to 17% by 2020.” Jemima sparkled with excitement. “That sounds really interesting and seems to be exactly what we want.” The adviser added, “The investment company approach has its attractions but it is important to get the share structure just how you want it. Consequently, we need to work with your solicitor and accountant.
Of course, the good news is that you are used to a company structure.” “Do we have to publish accounts?” frowned Jeremy. “Not necessarily. You could choose to be an unlimited company and there should be no drawback in that as long as you are not borrowing money to gear up your investments,” responded the adviser. “Would we have to give the kids seats on the Board?” Jeremy interjected. He broke into a broad grin when he was told “No.” “Excellent. I was hoping you would say that.” He rubbed his hands gleefully thinking of how frustrating “Junior” would find that. “Why have we not heard of this things before?” asked Jemima. Jeremy added, “I haven’t read anything about them either.” The adviser thought for a moment, “I assume because they are not a product that advisers get paid to set up via insurance companies and because they have only really become an option in the last two or three years. They are popular in London and the South East but no one is really talking about them up here.”
He continued, “They are not a mainstream solution and you need to be able to invest a decent sum of money to make them worthwhile, but they certainly need to be considered for people in your position. As an independent financial adviser, I can talk about such structures to you whereas a company representative, or “partner” may not.” “Great stuff,” said Jeremy. “Where do we go from here?”
Peter Rutherford is a Director at Rutherford Hughes Ltd. He can be contacted on 0191 229 9600 peter.rutherford@rutherfordhughes.com
