How can a family investment company assist with inheritance tax and estate planning?
A family investment company can assist with inheritance tax and estate planning in a number of ways.
When the company is incorporated, shares can be gifted to family members without incurring any immediate charges on the basis that they have little or no value at the date of incorporation and therefore there are no concerns with capital gains tax. The gift of the shares will be treated as a potentially exempt transfer for inheritance tax and therefore outside the estate of the donor provided they survive at least seven years. If the donor dies within seven years, it will be the value of the shares at the date of the gift, rather than at the date of death, that is brought into their estate and subject to inheritance tax.
Should the donor continue to hold shares in the family investment company at the date of death, the value of those shares will be continued to reflect the size of the shareholding and restrictions imposed in the articles and any shareholder agreement on the sale of those shares. The discount might be substantial meaning that the value remaining in their estate is significantly less than the percentage shareholding.
If the family investment company was funded by way of loan, that loan will remaining within he founding shareholder’s estate for inheritance tax purposes. However, they could consider gifting that loan to other family members allowing them to receive tax-free repayments of the loan. The value of the loan would fall outside the founder’s estate after seven years.
Shareholders will be subject to tax on profits extracted from the family investment company.
If the original shareholder funded the company by way of loan, repayments of that loan can be made without incurring any additional tax liabilities.