Mr and Mrs Smith ran a successful trading company whose shares had qualified for 100% Business Relief, making it highly efficient for Inheritance Tax purposes.
After selling the business for approximately £15 million, they lost this relief and faced significant IHT exposure.
With surplus capital to invest, they sought a tax-efficient investment structure that could also reduce their estate’s IHT liability, while considering future provision for their two adult children.
Mr and Mrs Smith established a UK company as a FIC.
They funded it with a £5 million founder’s loan, repayable to them tax-free over time.
They retained voting shares and remained the only directors, while gifting their children a 40% minority shareholding without surrendering shareholder or board control.
They also assigned £2 million of the loan to their children. If they survive seven years, it falls outside their estate, saving 40% IHT, while they retain control over repayment.
FIC investment income and gains are taxed at corporation tax rates rather than income tax rates thereby saving tax on growth and improving investment returns.
Gifting £2 million of the loan reduced their potential IHT by £800,000.
Future growth attributable to the children’s 40% shareholding falls outside the parents’ estates, further reducing IHT exposure.
The above example illustrates how succession planning and tax savings can be achieved with a FIC. However, no two cases are the same, and advice should be obtained suitable to individual goals and objectives.