This is the final instalment of our blog series on trusts. So far, I’ve considered the benefits and issues associated with trusts, as well as some viable alternatives. Now, I consider how the different options could be combined into a strategic tax plan.
As explained in previous blogs, there are alternatives to trusts, but if asset protection is what you need, regardless of the tax consequences, a discretionary trust will likely be the best. Otherwise, it’s a case of applying the best “tool”, or a combination of them, to your circumstances.
We accept that your affairs may not be simplistic, so let’s consider how a trust, Family Investment Companies (FICs) and Potentially Exempt Transfers (PETs) could all be used together to build a strategic tax plan for yourself.
Example:
PET
You wish to make a gift of £30,000 to your sibling who needs help purchasing a property. This feels like a simple gift of relatively low value, which would best be treated as a Potentially Exempt Transfer. You’re happy to give the money outright and not protect it in any way.
Trust
You also wish to provide for your four grandchildren, who are all in their early 20s and are currently unmarried.
You’d like them to benefit from your quoted portfolio of shares worth £300,000 that have a large gain accruing, but are concerned that they won’t be able to manage the assets. You’re also concerned about the risk of divorce from future spouses they may not even have met yet.
A discretionary trust could hold the shares, allowing for the assets to be managed by the trustees, who have the power to decide how and when your grandchildren would benefit from the trust. A PET certainly doesn’t feel right because they might not be financially ready for a large lump sum, while the cost of a FIC may outweigh any benefit. So a trust seems to be the best fit in these circumstances.
Any gain accruing in the assets can be deferred on transfer to the trust, so there’s no tax payable in transferring the portfolio to the trust.
FIC
Having made your gift of cash and and transferred shares to your grandchildren’s trust, it’s time to turn your attention to the cash sitting in your bank account following the sale of your business for approximately £2m.
You may need to call on this sum in the future, but you certainly shouldn’t need any more than this. You therefore lend the money to a newly formed Family Investment Company. Multiple classes of shares are issued, and various members of your family (children, grandchildren, etc via a trust) subscribe for the shares. Meanwhile, you retain shares that may give you a limited right to capital and income, and give you all the voting rights.
The multiple share classes allow for dividends to be declared in an income tax-efficient manner. And once the loan has been repaid, the bulk of the value of the shares are in the estate of the wider family shareholders. The value of your own shares is limited to the rights they have. If you don’t need all of the loan, the loan can also be given away at a time in the future.
Of course, there are tax consequences to consider for each of the above, and there may indeed be other options available, but this demonstrates how tax planning tools can be applied in different ways.
If you would like to arrange a meeting to understand more about how to best use tax planning tools in your own circumstances, please get in touch with a member of our Private Client team or call us on on 0333 123 7171.
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