For taxpayers looking at ways they might mitigate future inheritance tax (IHT) bills, trusts have historically featured high on the list. However, many people have been reluctant to transfer their hard-earned cash to a trust because of concerns over the perceived lack of control that comes with establishing a trust, even if they are appointed as the first-named Trustees.
The UK’s tax regime for trusts was also the subject of significant changes in the Finance Act 2006 that had the effect of triggering an immediate IHT bill for many people on the transfer of assets into trusts. As a result, many people have looked at alternative vehicles for passing on family wealth.
In this context, a private investment company (PIC) is increasingly seen as a tax efficient vehicle for wealth preservation.
In brief, a PIC is a UK resident private limited company whose shareholders are typically family members and the operation of which is governed by its own Memorandum & Articles of Association. Within these constraints, the PIC can invest in a range of investments including cash, shares, investment funds and property.
Having bespoke Articles of Association also gives a donor shareholder of the PIC the ability to retain a significant element of control over the investment strategy of the PIC, whilst owning less than a majority stake in the company’s shares.
For higher rate taxpayers, this structure gives the benefit of being able to retain higher post-tax profits (corporate tax rates of 20% compare very favourably with personal tax rates of up to 45%). Specifically, a PIC will also benefit from the fact that UK and most overseas dividends will not be taxable in the PIC and in addition, it will be able to claim indexation allowance on any gains realised by it, therefore wiping out inflation increases. There is a further benefit that shareholders only pay tax to the extent that the PIC distributes income to them. If profits are retained within the PIC, the reinvested funds can grow without this layer of additional tax.
If an individual has available cash, monies can be transferred to the PIC without triggering an immediate IHT charge which compares well to a trust when an immediate 20% IHT liability will arise on transferring funds over £325,000 into most trusts. Gifting PIC shares to other family members is also free of IHT provided the donor survives 7 years following the date of the gift (although some care needs to be taken of the capital gains tax consequences).
With the present, very attractive low corporate tax rates, a PIC is something that should seriously be considered as an alternative to a Trust, especially where there is available cash to fund the PIC and there is no need for access to significant profits so they can roll up within the structure.
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