Well, I haven’t written much for a while, and in part that’s just because I’ve been quite busy. Although that’s a pretty rubbish excuse isn’t it really? In truth, it’s more because I haven’t felt inspired for a while to write about any specific topic.
Actually, that’s probably not true either. In fact, what I have wanted to write about recently has been a little controversial then COVID-19 came along and said hi.
Anyway, now that I’ve finished my purge about why I’ve been relatively quiet, and of course confessed to my propensity for controversy (although those who know me well already know that about me), I want to talk about a spectacularly misunderstood topic, Trusts.
Just before you reach for the alcohol, believe me when I tell you that trusts are an exciting topic and are largely misconstrued, misused and often, mis-sold.
Given that trusts can be supremely complex, and cover a very wide range of issues, I’m going to stick to a brief comparison between Family Investment Companies (FICs) and a Flexible Family Trust, let’s just call the latter a trust.
Post the 2006 changes (which I won’t go into, save to say that the tax man went in with steel toe cap boots) trusts have fallen slightly out of favour, and that’s largely because of the hefty taxation designed specifically to drive planning away from trusts, and into a more transparent alternative.
On top of that they tend to have, for those that are not in the know, an air of ‘someone is doing something wrong’ about them. Unfair? Probably.
Enter the FIC. To a degree the uptake has been an easy transition, and it’s no surprise. That’s in part because most people simply understand the mechanics of how a company works. You have directors instead of trustees, shareholders instead of beneficiaries.
One of the attractions of a company set up is the lack of entry charge, and I’m talking assets on to the balance sheet here. You can have a little problem called capital gains when moving assets from a business on to a company balance sheet, but with some sound advice you can deal with that. Compare that with a trust, where if you transfer in an asset during your lifetime, anything over the value of £325,000 (your current nil rate band) and you’re hit with a 20% charge.
You can do all that again if you like in another 7 years, but then if you die in the meantime you’ve just used up your nil rate band, and all sorts of other issues around potentially exempt transfers which I won’t bore you with. That’s a pain. Not for you because you’re dead, but rather for those who pick up the tax bill. First world problems and all that, but costly nonetheless.
Add in lower taxation with FICs paying corporation tax (19% currently) rather than income tax at 45% under a discretionary trust set up. On top of that there are plenty of other tax efficiencies that just work with an FIC, one being the use of dividend income for example.
On exit, and by exit I mean when you’re done with it all and want to step off the wheel, there is the benefit of Entrepreneur’s Relief at 10%, or if you really want to just kick the tax bill down the generations, Hold Over Relief. So all round simplicity, and easy to understand. Well, that’s a relief!
But is it? Well, define simple and easy. It’s pretty easy to transfer shares to someone else, for example when you want to change the structure around ownership. Appropriate meeting, fill in some forms, change the company register. Easy right? Wrong! Try to do that without considering capital gains for example. Not so easy now my friend.
For all the benefits of using an FIC (and we haven’t even tickled the tummy of them), trusts can still be very useful. You can create a simple structure to provide for future generations, for example. Beneficiaries can be added and removed more easily than with FICs, and remove the headache of tax considerations when compared to transferring shares in an FIC set up.
Trusts can provide an excellent tool for family businesses, particularly where that business is a valuable operation.
Often family businesses are not taken on by all of the next generation. Assuming the original owners, usually the parents, adopt a fair and equitable splitting of the family assets (and believe me, that’s not always the case) it’s very easy to perhaps pay a smaller dividend to children who are not involved in the running of the family business, but their parents still want to treat all their children fairly, and a larger one perhaps to the children that do work in the business in recognition of their input to it’s running and potential growth.
Set up properly, trusts can provide not only a fair return to all, relative to the facts but, they can also offer flexibility should involvement in the business fluctuate at a future date.
In summary, FICs are proving to be a popular vehicle, and it’s certainly the way the tax man might prefer people to go. That said, for many, the optimum solution may be to consider a combination of both, taking into account the need for asset protection, flexibility, and of course that old chestnut, tax efficiency.
This information provided in this article is not intended to constitute legal advice. Your specific situation requires careful consideration in our view by a person fully qualified before decisions are made and before you embark on a certain course of action.
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