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Could a “Family Investment Company” be part of your family’s portfolio?

For a long time, Family Investment Companies have been the preserve of the very wealthy. But, even for those of modest wealth, the attractions of using limited companies to hold wealth is seeing them becoming more popular.

These attractions include income being taxed at a lower tax rate combined with effective extraction polices. They allow capital to be controlled by the senior generation whilst passing a substantial interest in it on for Inheritance Tax purposes. Use of different share classes can also address different needs of the family, typically with a mix of income shares, growth shares and
freezer shares that can vary rights and votes to achieve a number of planning objectives.

Such companies can come into existence by chance, for instance when a business is sold from a family company and it becomes a cash shell that would suffer further substantial tax if wound up.

In other cases, they are deliberately set up and can be funded with cash or investment injection to establish them. These can either be for shares or a mix or shares and loans that can be repaid over time allowing effective tax-free withdrawal of cash until repaid.

They can be particularly useful if there is land or investment properties that can pass a test as qualifying as a business in tax terms. In cases like this, any pregnant gains in the assets can be rolled over into the shares themselves when the business is incorporated. The subsequent sale of the assets by the company can be based on a much higher uplift to market value on transfer to the company, resulting in a potentially considerable saving on the sale of development land or winding down a property portfolio. The gain in the shares falls away on death or shares can be gifted into family trusts with holdover elections.

Specialist help and advice is required as there are tax avoidance issues to be aware of. They are also perhaps at the more aggressive end of tax planning and HMRC is said to be concerned about the growth of use of them. So some further tightening of rules and curtailment of  benefits could come into existence after they have been set up. If it is something you are considering, please ensure you are fully briefed; that you understand the structure you want to create, the purpose of it and the risks and potential issues that might come with the management of this sort of arrangement.

Once established, how you run these companies and what you do with their capital is very much up to you. Examples of what the seriously wealthy have achieved can been seen in some quoted Investment Trust Companies still largely controlled by their founding families: for example RIT Capital Partners PLC, holding much of the Rothchild’s wealth and Caledonia Investment Trust PLC, holding the Cayzer family’s.

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