Background
After taking an apprenticeship in plumbing during his late teens Jake Shaw (name changed) went to work for a local tradesman as a plumber’s mate in 1984. Health issues led to his boss’s early retirement leaving Jake to run the business and take care of not only his own family but also his now retired boss and his wife. Jake gradually added a second van to the operation, then a third and fourth etc until he found himself with a thriving company that he had built with over 50 employees and multiple premises. During this time changes in health and safety regulations meant that Jake was forced to fit his team out with new high vis safety clothing. Understanding the value of his brand he purchased an old iron on, print machine and produced the clothing with the company name on. What started as a flight of fancy gradually took on a life of its own with Jake producing personalised and branded clothing for businesses, local authorities, sporting clubs and even Stag and Hen parties.
Within a few years he had purchased brand new state of the art machinery as his incomings were far greater than his outgoings, he took his ex-bosses advice “you’ll never go wrong in bricks and mortar” and invested in three buy to let residential properties over a period of five years. He also acquired development land, although he never seemed to have enough resources to follow through and develop.
A health scare, as often happens, made him re-evaluate things and think about encouraging his oldest son to be more involved in the day to day running of the businesses. Until this point he and his wife had run the trading and investment as best they could but they relied heavily on the accountant and solicitor to manage the things that they didn’t fully understand. This was a frustrating situation to be in and although Jake had looked at trusts, he didn’t want to hand over complete control to his solicitor as trustee, even though he was a childhood friend. Ideally, he wanted himself and his family to control and manage everything so that he felt comfortable that what he had built over 35 years lasted another 35 and benefitted those he loved.
Summary of Current Status
Plumbing company worth £5.5m with £500,000 profit and £1.5m worth of business premises
Clothing company worth £1.5m with £125,000 profit and £500,000 light industrial unit
Three 2 bed terrace houses worth £300,000 each
1 acre plot development land worth £250,000 with B8 Planning Permission for a 1000m2 storage and distribution warehouse with projected £750,000 build cost
Main Residence worth £850,000
What Are The Potential Advantages Of A Family Investment Company?
A Family Investment Company (FIC) is a holding company with unique alphabet shares that allows families to receive dividends from their trading companies, retain the funds tax free to reinvest without having to pay the higher 33.75%+ dividends tax. There are four main types of shares that an FIC usually has:
Voting
Freezer
Growth
Dividend
Voting Shares
The Voting shares have a nominal value and are redeemable by the company, this prevents the shares from being lost to creditors, divorce and probate, usually a separate class of voting shares, called golden shares, are given to close family, god parents or even a trust to make sure that no one family member has a majority and vote the others family members out of the FIC by voting to have their shares redeemed. A Shareholders agreement can also be used to prevent this as well.
Freezer Shares
The Freezer shares are fixed value preference shares issued in exchange for cash, assets or shares in companies that will become subsidiaries of the FIC. The freezer shares don’t have voting rights but could have a fixed annual coupon to provide a set income to the ones putting in cash, assets and shares.
The Growth shares are used to pass on the future value of the FIC and are usually held in trust for the children and grandchildren. Their initial nominal value allows them to be gifted into trust without the 20% inheritance entry charge.
Dividend Shares
The Dividend shares are also nominal value, so they can be sold to family members for £1 and redeemed by the company to prevent them also being lost to creditors, divorce and probate. The multiple different classes of dividend shares allow each family member to receive a different amount with the aim to use up every family member's personal allowance and lower 8.75% dividend tax up to £50,000.
Strategy
Mr Shaw was currently paying himself and his wife a £50,000 salary and then taking the rest as dividends, which meant he was paying 33.75% to 39.35% tax on the dividends.
The plumbing business was making a good profit each year but the clothing business had outgrown the current premises and required the larger premises to expand.
The Solution
Was a Family Investment Company (FIC) to own both companies, receive the dividends tax free and invest into the development land to build the new larger premises.
A FIC was set up with Mr & Mrs Shaw as the voting share holders along with one dividend share each, this allowed them to pay each other a different amount of dividends each year. The Growth shares were placed in trust for the children and future grandchildren, as they were only worth £1 each before and assets were added to the FIC the gifting of these shares didn’t have any capital gains tax (CGT) or inheritance tax (IHT) issues to worry about.
Both companies were valued by the accountant at £5.5m and £1.5m, the shares were then swapped for £7m worth of Freezer shares in the FIC. These freezer shares were fixed redeemable preference shares which meant as the companies continued to grow the future value was captured by the growth shares held in trust rather than in the shares Mr & Mrs Shaw held.
These Freezer shares received Business Property Relief (BPR) just like the shares in the two separate companies did before, as the FIC was classified as a trading group at this point. BPR was capped at £1m each during the 2024 Autumn Budget which meant the £2m of the £7m Freezer Shares had 100% IHT relief but the other £5m now only had 50% relief on the 40% IHT, which was potentially a £1m IHT bill for the children to deal with. To solve this the FIC set up an Employee Benefits Trust (EBT) and £5m worth of Freezer shares were gifted to the EBT, £2.5m each from Mr & Mrs Shaw.
Given that the children were now working for the family businesses they would eventually benefit from these shares, plus the shares were only redeemable by the voting shareholders approval which was Mr & Mrs Shaw then the children, this meant these shares were still fully under the control of the family.
£1m Freezer shares
The £1m Freezer shares that Mr & Mrs Shaw retained could be sold back to the company and they would receive Business Asset Disposal Relief (BADR) which would reduce the CGT down to 14% (18% from 2026) instead of paying the 33.75% to 39.35% tax on the dividends.
Mr Shaw was able to save £400,000 each year into the FIC free of the 33.75% to 39.35% tax on the dividends which allowed him to build the distribution and warehouse unit within 2 years.
The three buy to let properties were placed in a Limited Liability Partnership (LLP) with Mr & Mrs Shaw as 50% partners. The FIC then lent the LLP the funds to expand the property portfolio to become a property rental business and in turn incorporated into a limited liability company (Ltd). Once the properties were incorporated free of SDLT and the CGT was held over into the shares of Ltd, the shares were worth £1m with the original purchase price of the three properties as the base cost of the shares. The base cost was calculated at £700,000, this meant when these £1m shares were redeemed in the future there would only be 30% CGT and this was also further reduced by the BADR of 14% instead of the usual CGT of 24%. This would be 4.2% CGT tax on the £1m shares when eventually redeemed by the FIC.
The Plan
Using these shares for their retirement instead of the other Freezer shares which had a base cost of £0, meaning the full BADR 14% CGT was payable by Mr & Mrs Shaw if they were redeemed by the FIC. The £0 base cost shares were the ones mainly gifted to the EBT due to this fact.
The EBT also didn’t have the 6% charge every 10 years plus when the employees, which were mainly the children inherited these Freezer shares, the CGT would be cancelled out, so the children could redeem them tax free. Mr & Mrs Shaw also agreed to not let the children redeem the shares in their personal name, then children would have to gift the shares to a family discretionary trust which would then them the funds, these was part of the estate plan they put in place to prevent the funds from being lost in divorce, to creditors or gifted to people outside the direct family bloodline.
Mr & Mrs Shaw set up a fiduciary under the FIC to act as the family corporate trust for the multiple trusts they had and even looked at setting up more trusts for the grandchildren as the management and administration of extra trusts was minimal.
The clothing company expanded with the new warehouse facility and grew the family wealth to £10m+ without any IHT issues. Once the mortgage was paid off on the house, they started gifting the maximum of £325,000 equity in the house to separate trusts with the FIC’s fiduciary as the trustee.
At the end of the process they each had £1.5m worth of shares, £500,000 each they planned to redeem with only 4.2% CGT on them to fund their retirement and £1m each to gift to the children in their Will using up their £1m BPR allowance, the other £5m where in the EBT and potentially would only be used if the £2m wasn’t enough to buy all the children a home in the future.
