Effective exits - insight

By Steve Brandreth, senior client partner, Artorius (Midlands UK)

In conjunction with other professional advisors, particularly corporate financiers, in the Midlands, I am experiencing noticeably increased activity involving business owners looking to structure an exit. 

Perhaps aware of possible changes to capital gains tax and/or entrepreneurs relief, this has been the catalyst to conversations about the structure of wealth once out of the company. The application of both trusts and family investment companies are therefore worth discussion.

What are they?

A family investment company is a company which is used as an efficient vehicle for estate planning, becoming popular following changes to the taxation of trusts (2006). They enable significant wealth to be passed on to future generations – while both protecting and retaining control over assets.

A trust is a legal arrangement where cash, property or investments are given to someone else so they can look after them for the benefit of a third person. Certain types of trust are taxed differently and involve a settlor (who places assets into the trust), trustee (who manages the trust) and beneficiary (who benefits from the trust). They are established to control and protect family assets, to pass on assets while the settlor is alive and to pass on assets when someone dies.

Advantages of these two structures

• Funds can be gifted into these structures and can be efficient for Inheritance tax (IHT) mitigation
• Bespoke, flexible arrangements which can be tailored to family circumstances
• Control and distribution of the assets can be achieved by undertaking a role of either Trustee or as a Director of the FIC.
• A degree of asset protection can be achieved in the event of divorce.

Disadvantages of these two structures

• Funds must be ‘given away’ so even where control is retained, the ability to benefit (in whole or part) is sacrificed by the settlor(s)
• A degree of complexity and additional cost at establishment and ongoing.
• Some potential loss of autonomy concerning investments held within the structure, dictated by the individuals with responsibility for the structure, the structural limitations or taxation constraints.

Key differences

Each structure will be ‘optimal’ in a variety of client circumstances. Clients’ objectives and priorities are reviewed alongside differing opportunities offered by FIC and Trust. The areas of divergence that often make apparent the different opportunities may be:

• The amount/type of assets that can be placed into each structure and at what tax consequence
• The initial/ongoing charges and reporting requirements for operating the structure
• The degree of disclosure that there must be for each structure (to the wider community and to the underlying beneficiaries / shareholders)
• The taxation applicable to the structure

Adopting these structures in isolation or combination creates flexibility and choice in how and which assets are held, optimising tax efficiency of each structure. Both would seek to offer a degree of protection from divorce/bankruptcy. 

This is a complex area and requires both tax, legal and financial advice before implementation. Artorius work collaboratively with tax and legal advisers when analysing potential recommendations.

Potential applications

• Clients with sufficient wealth for their own resources and keen to undertake Inheritance Tax planning. Making provision for children but not passing funds directly to them currently with a preference that they are unaware of any future entitlement.
• Clients with large shareholdings in listed companies, expecting a share price increase in subsequent years – perhaps with embedded gains already. Looking to make dividend provision to shareholders, most likely children, at the client’s discretion.
• Clients wishing to control family assets, retain access to funds if required with a view to pass on wealth to subsequent generations, whilst protecting wealth from divorce/bankruptcy where possible.

Important information

For information purposes only. The benefits and disadvantages described are subject to change, sometimes retrospectively. Artorius does not provide tax advice; any reference to taxation treatment is our current understanding and may change.

For further information contact Steve Brandreth on 0115 880 0602, 07810 334150 - Steve.brandreth@artorius.com

*This blog is part of a commercial package with Birmingham Business