To mark Scottish Family Business Day, Robert Burns, partner at Scottish law firm Burness Paull, takes a look at how a business can be structured to suit your family’s needs.
When putting plans in place to pass on wealth to the next generation, people traditionally looked straight to Trusts. But with changes in tax legislation and often complex personal circumstances to consider, Family Investment Companies (FICs) can be a sensible alternative to protecting assets for the future.
When most people think of succession planning, they think of how they will give away their assets. But what if there was a more sustainable option which, as well as allowing you to pass wealth, ensures that your family is protected for generations to come?
In the UK, a FIC is ordinarily constituted as a private company limited by shares. The directors and the shareholders are generally individual family members. It is operated as any company would and may even take on employees and directors outwith the family.
The appeal of a FIC is it allows the founding member holding the majority of the wealth to pass it to family members whilst retaining control over how and when it is distributed, both during the Founder’s lifetime and after. It also gives the Founder an opportunity to impart experience and be left with the peace of mind knowing their children (and grandchildren) will continue the business after they are gone.
A FIC is a very flexible structure. Commonly different sets of shares will be created with the Founder retaining a minority but controlling shareholding. The other shareholdings which carry the economic value are then gifted to family members. This can allow the Founder to pass control over time.
Different classes of shares means that the shareholders can receive the benefit of the profits at different times and at different amounts (i.e. declaring dividends to one class of shareholder and not the others) or shareholders can have varying rights to capital on a winding up. For example, those family members involved in running the business of the FIC may be given a preferential right on their shares to reflect their contribution.
Another appeal of a FIC is that it can be more tax efficient than a Trust. FICs can accumulate profit with the benefit of the UK’s low corporation tax rates (currently 19% and set to reduce even further to 17% in 2020) compared to personal and trust income tax rates which can be up to 45%.
But the use of FICs doesn’t necessarily signal the demise of Trusts (often, Trusts will be used as part of the FIC structure or as an alternative form of succession planning running in tandem with the FIC).
Any Wills and Powers of Attorney in place should be reviewed to ensure they work with the FIC (or Trust) structure.
Whilst fundamentally the FIC is a traditional company, care needs to be taken in how these arrangements are put in place. There are various potential pitfalls that can undermine the Inheritance Tax benefits if the structure and rights are not constructed properly. It is vital that you speak to tax and legal advisers who are experienced in these matters to ensure the right structure is tailored to your personal circumstances.