Trusts – some alternatives
We’re running a series of blogs on the role trusts play for high net-worth individuals. In my first blog, I looked at the basics of what a trust involves and the benefits they can offer. This time, I’m considering two alternatives to a trust.
Family Investment Companies
Firstly, a Family Investment Company (FIC) is often considered as a suitable alternative to a trust.
A FIC can be set up in a number of ways but, broadly, the principles are the same:
- The pseudo-settlor (let’s assume this is a parent) forms a company and often makes a loan to the company
- Shares are issued to a number of family members, often having different share rights. These shares are often held in trust to protect them from third parties.
- Typically, children’s shares will have a right to income and the capital of the company – this is the route by which value is reduced in the parent’s estate and thereby saving inheritance tax (IHT), whilst the parents often retain the voting rights so they still maintain overall control.
The aim is that the growth in value of the company will be outside of the parent’s estate for inheritance tax purposes. Although the value of the loan to the company is still included in their estate until this is either drawn down and spent or the loan is gifted to the children in the future.
Individuals who accumulate wealth from building and growing their own business will usually be more comfortable and familiar with a corporate structure, rather than a trust. Ultimately, tax is only one aspect – we want clients to be comfortable with any planning put in place, so this familiarity may be a deciding factor.
Potentially Exempt Transfers
The second alternative to a trust would be to make outright gifts to those you wish to benefit. These are known as Potentially Exempt Transfers (PETs). Gifts directly to individuals will not incur an immediate inheritance tax charge, though there may be capital gains tax consequences if the gift is not simply cash. However, there is virtually no entry threshold for the value of the gift, and the arrangements are usually very simple – though advice should still be sought to make sure the gift is effective for IHT purposes. This is likely to benefit those who do not feel asset protection is necessary.
For any enquiries regarding trusts, FICs and PETs, get in touch with our specialist Private Client team or call 0333 123 7171. Part three of this blog series will look at the wider issues associated with trusts.