Inheritance tax planning with a Family Investment Company

The core idea is straightforward. The founders subscribe cash for shares in a new company. The company invests. Because the next generation holds shares entitled to the growth in value, that growth accrues to them from the outset rather than accumulating inside the founders' estate and being taxed at 40% on death.

Cash subscribed for shares at market value is not a gift, so there is no lifetime inheritance tax entry charge and no seven-year clock on the subscription itself. Where shares are gifted to family members, the usual potentially exempt transfer rules and seven-year survivorship period apply to that gift.

The articles of association and share structure determine who controls the company and who benefits from it. Typical designs separate those two things deliberately:

• Voting shares, often a small holding retained by the founders, carry the votes and therefore control over investment policy, dividends and appointments.
• Growth or alphabet shares held by children or by a trust take the future increase in value, so that growth sits outside the founders' estate.
• Preference or frozen shares can give the founders a fixed entitlement to capital or income where they still need access to funds.
• Dividend rights can be set class by class, allowing distributions to one adult child in a given year without paying every shareholder. Dividends over £100 a year to a parent's minor child are taxed on the parent.
• Growth shares are usually issued with a hurdle, so they only share in value above the founders' capital. Without one, issuing them can itself be a transfer of value.

The value the founders put in does not vanish from their estate. If they subscribe £2m in cash, they hold shares or a loan worth £2m, and that remains chargeable on death. What the structure addresses is everything the £2m goes on to earn. Over a twenty-year horizon that growth is often the larger number by some distance.

Where the founders can afford to give value away outright, gifting shares starts the seven-year clock and can take the original capital out of the estate as well — while the retained voting shares mean they are not giving up the decisions.

• Gifts with reservation of benefit: if founders retain a right to benefit from what they gave away, the value can be pulled back into the estate.
• Business relief does not usually apply. An investment company is not a trading company, so do not assume a 100% relief on the shares.
• The company pays corporation tax on its profits, and shareholders pay tax on dividends drawn out. This double layer is the price of the deferral.
• Shares gifted to minor children are often held on trust, which brings the trust tax rules back into the picture.
• Gifting shares into a discretionary trust is a chargeable transfer, not a potentially exempt one, so value above the nil-rate band can face 20% immediately.
• Loans to the company sit in the estate at face value and should be documented properly.

A Family Investment Company generally repays its setup and running costs where there is a meaningful pool of investable capital, a long investment horizon, an intention to retain and reinvest rather than spend, and a founder who is not ready to relinquish control. Below roughly £1m of surplus capital, simpler gifting and allowances often do the job more cheaply.