A study in gifting – the challenge of large-scale wealth transfer

Whilst you can give any amount away as outright gifts, and IHT may only be payable if you die within seven years of making each gift, you are restricted where control is a requirement. 

Chargeable lifetime gifts to discretionary trusts will be subject to an initial 20% IHT charge on any gifts made in excess of £325,000 over a rolling seven-year period. This is a problem for those looking to transfer sizeable amounts of wealth as part of their inheritance strategy.

Family Investment Companies (FICs)

Following Gordon Brown’s changes to the taxation of trusts in 2006, which brought more trusts into the relevant property regime that applies to discretionary trusts, an alternative solution was considered for wealthier individuals using a corporate structure. The Family Investment Company (FIC) enables significant amounts of wealth to be transferred but without the £325,000 (£650,000 for joint donors) restriction that applies to discretionary trusts if no initial IHT charge is to be paid.

Establishment

Assets and cash are used to subscribe for shares and there should be no immediate tax implications if the value of the assets and cash transferred to the FIC is the same as the value of interests received in exchange. ‘Freezer’ shares lock in the current value of existing assets and provide control for the donors while ‘growth’ shares allocate any future increases in asset value to the intended younger beneficiaries. The gifts of the growth shares are potentially exempt transfers (PETs) for IHT purposes, so IHT is only an issue if the donor(s) do not live at least seven years after making the gifts. However, to avoid any significant CGT liability, the shares should be gifted as soon after creation as possible before the value has grown.

The transfer of assets into the FIC will be a disposal by the donor(s) so that capital gains tax (CGT), and stamp duty land tax (SDLT) in relation to property, will be triggered where relevant. However, these costs must be considered in the context of the IHT savings being achieved.

Legal involvement

Specialist legal input is needed at outset to ensure the wealth transfer objectives are met. This involves drawing up bespoke articles of association and shareholder agreement creating different classes of shares to ensure the intended recipients can receive their entitlement. Control is exercised through the board of directors with the donors typically being on the board and having the voting shares if they do not require benefit themselves but want any growth to be for other family members.

Ongoing taxation

FICs are subject to corporation tax, currently 25%, on any gains and interest income received although dividend income is received tax-free. Any distribution of profit to shareholders will be subject to dividend taxation at the recipient’s rate; 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate taxpayers. The dividends paid will be set against each recipient’s dividend allowance (currently £500).

Expenses incurred in the managing of the investments and running the business are eligible for corporation tax relief as is interest paid on any loans.

As intergenerational wealth transfer becomes increasingly important, and more so following the proposed changes to the IHT treatment of pensions and business and agricultural relief assets, suitable strategies are increasingly including the use of FICs to mitigate IHT and ensure bloodline protection of wealth where significant amounts accumulated are to be transferred.

HMRC were keen to understand the use of FICs and whether there could be questionable tax outcomes, but they disbanded their investigation unit in 2021 which implies a tacit approval of using FICs. That said, overcomplicated multi company structures including FICs may still attract attention.

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

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9. A study in gifting – the challenge of large-scale wealth transfer
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