Do you know the tax benefits of setting up a Family Investment Company LLP? Find out how it can benefit your business.
(6-minute read)
We will cover:
- The tax treatment of FICs and LLPs
- How a hybrid structure can benefit you and your family
Family Investment Company vs LLP Tax
A Family Investment Company (FIC) is a private limited company that is owned and controlled by family members.
It’s a flexible structure that helps you safeguard your wealth, grow your business, and pass on your wealth to your family with lower taxes while still keeping control.
Its benefits include:
- avoiding paying Inheritance Tax on your capital
- separating your business operations from your investments
- supporting your investment goals
- investing in different asset classes
- retaining Business Property Relief (BPR)
- protecting your assets outside of your estate
As outlined in a previous article, if you own a profitable company, it’s important to protect your wealth and keep growing it.
However, you also need to think about Inheritance Tax, regardless of your age, to protect your finances and reduce its impact on your family in case of the worst scenario.
And a great way to do that is by setting up a Family Investment Company.
In a nutshell, Family Investment Companies are used as a vehicle for transferring wealth between generations and to manage family assets.
On the other hand, an LLP (Limited Liability Partnership) is a type of business structure that combines the flexibility of a partnership with the limited liability of a company.
A Family Investment Company LLP is a combination of a Family Investment Company and an LLP.
This structure creates a corporate entity that has the flexibility of a partnership and provides limited liability protection to its members.
It’s a new concept that’s gaining popularity among families as a way to manage their wealth and assets while reducing tax liabilities.
So how could it benefit you and your family?
Why set up a Family Investment LLP?
As advisers to families, we understand the importance of maintaining continuity for family wealth, especially for those who have built their fortunes from the ground up.
You want to see your investments and property portfolio managed effectively and benefit all family members and future generations.
Holding assets in a single entity, such as an LLP, provides administrative convenience and eliminates the need for frequent transfers of ownership.
Moreover, LLPs offer you the opportunity for control and management, as well as the ability to govern with clearly defined rules outlined in the LLP agreement.
This is particularly important for first-generation wealthy individuals who want to retain control of their wealth while alive.
While one may argue that a family investment limited company can offer similar benefits, the tax implications of owning wealth through a limited company can be complex and costly, making LLPs the clear choice.
The tax advantages of LLPs are substantial and easily accessible, making them the superior investment vehicle when compared to companies.
In the following sections, we’ll explore the tax benefits of LLPs in more detail.
Benefits of setting up a Family Investment LLP
In a nutshell, these are the main benefits of the Family Investment LLP:
- Wealth management: It provides a structure for holding investments, such as shares, property, or other assets, and allows you to effectively manage these assets.
- Succession planning: It can also be used to transfer wealth between generations. By transferring assets to the LLP, family members can retain control of those assets while passing on ownership to the next generation.
- Tax efficiency: A Family Investment LLP can offer Inheritance Tax relief and capital gains tax benefits. It can also provide flexibility in terms of tax planning, allowing families to manage their tax liabilities more effectively.
- Limited Liability: Family members can limit their personal liability for any business debts or legal issues that may arise. This can provide peace of mind and help to protect family wealth and assets.
Tax benefits
- Inheritance Tax (IHT) Planning: One of the primary benefits of setting up a Family Investment LLP is its potential to reduce IHT liabilities. When assets are held within the LLP structure, they are not considered to be part of the estate for IHT purposes. This means that assets can be transferred between generations without triggering IHT charges.
- Capital Gains Tax (CGT) Efficiency: Another potential tax benefit of Family Investment LLPs is their ability to reduce CGT liabilities. For example, if a family member transfers an asset, such as a property, to the LLP, they can do so without incurring CGT. When the asset is later sold, any gains made can be shared amongst the LLP members, potentially reducing the overall CGT liability.
- Income Tax Efficiency: Family Investment LLPs can also be structured in a tax-efficient way to minimise income tax liabilities. For example, profits earned by the LLP can be distributed to members in a way that reduces their overall tax liability.
- Business Property Relief (BPR): In some cases, Family Investment LLPs may be eligible for BPR, which provides relief from IHT on certain types of business assets. This can include shares in unlisted companies, which can be held within the LLP structure.
Example
So how does this work in practice?
For example, if you own a property and plan to sell it for a profit, it’s best to involve your family members in the ownership as early as possible to avoid paying high taxes later on.
For example, forming a family investment LLP can help distribute the ownership of the property among family members.
This means that any profits made from the sale of the property can be split equally among family members, reducing the amount of tax owed.
If you haven’t planned ahead, there are still some options available to distribute ownership and reduce taxes.
For instance, transfers between spouses and civil partners are tax-free, and properties can be given to trusts with hold over relief.
However, using trusts can trigger Inheritance Tax if the total value of transfers into trust exceeds the nil rate band.
By involving your family members early and utilising these tax-efficient methods, you can protect your wealth and ensure that your family benefits from it in the future.
Make sure to speak to us before making any decisions regarding your business – we can help you plan the most efficient tax strategies that are compliant with HMRC rules.
Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.
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Kind regards Ilyas