Chris Thorpe looks at necessary tax considerations when structuring a family company.
Whether it’s starting a new business from scratch or inheriting a well-established one from retiring family members, one of the main factors (but not the sole one) is likely to be the ongoing tax position of its stakeholders, the inheritance tax (IHT) position of the retirees, and within all that, the ability to pass it on to the next generation with minimal tax consequences for anyone.
There is no one set, fixed way of structuring a business to achieve all this. It will depend on the business, the family and the intentions of their members. Will the kids even want to take over the business? Can they be trusted to do so? Are there children from previous marriages to consider? What if there’s animosity between parents and a son-in-law or daughter-in-law? What if there’s animosity all round?
Example: Family investment company
Take the scenario of a property investment company: mum, dad and three grown-up children – one married with kids but who has their own career to focus on (child 1); one unmarried and no kids but is increasingly managing the business (child 2); and the third, with children, who is involved in the business but whose marriage is looking very uncertain (child 3).
Income or corporation tax
As this is a limited company, all three children could be directors – each taking a small salary and pension contributions.
They could all hold shares too, which could be ‘alphabet’ shares to allow the more active children (child 2 in particular) to receive income from the company by way of dividends. This can also accommodate those with other income and who might be pushed into the higher or additional rate brackets with these dividends (child 1).
Extra dividends would need to be justified, or the ‘settlements’ legislation could intervene. The alphabet shares and combination of a small salary and top-up dividends plus pension contributions would mean that income and corporation tax was likely mitigated as far as possible.
Child 3 might be cause for some concern with their shareholding, as these would almost certainly be subject to a marriage settlement were they to get divorced.
Capital taxes and succession
IHT would be an issue here as the company is not trading, so business property relief (BPR) would not be available to the shareholders. Mum and dad should do something with their shares in their lifetime to mitigate the IHT position (at least on second death if everything is bequeathed to the other upon first death). Combined with that are the thoughts toward succession.
Mum and dad could give all or most of their shares to their children now while they’re still alive. They could still retain directorship, employee or consultant positions to keep their hand in the business – providing the benefit of their experience and taking a small salary. However, capital gains tax (CGT) will be payable by mum and dad as a ‘dry’ tax charge on these gifts. There would be no CGT on bequests upon their deaths, but the IHT charge is arguably a greater concern. Therefore, they may want to consider putting some shares into trust for all their children or grandchildren. Doing this will attract no CGT charge (due to ‘holdover relief’ under TCGA 1992, s 260), and £650,000 worth in total from both parents would attract no immediate IHT charge. Not only could this help the parents’ IHT position after seven years, but they would retain some control as trustees; the shares being in trust means that child 3’s holding has more protection from a divorce settlement. Child 1 would also be provided for even though they have no active involvement in the business.
Practical tip
Every scenario, family, and business is different, so there is no one ‘quick fix’; but a combination of lifetime gifting, trust planning and bequests on death can mitigate the CGT and IHT whilst, hopefully, providing for succession planning and current business requirements. Effective use of salary, pensions and dividends can ensure income and corporate taxes are mitigated as far as possible.
