In this article, we look more closely at tax-efficient company structures for higher rate taxpayers, namely Family Investment Company LLPs.
We will cover:
- Why Family Investment LLPs are part of a tax-efficient strategy
- How these structures can help you save tax
Tax-efficient investments for higher rate taxpayers: An introduction
If you’re a higher-rate taxpayer, you’re aware of the significant tax rates that could befall on both your capital gains and dividend income.
For that reason, tax-efficient investing is a crucial component of your financial planning.
This is because a poorly-planned, tax-inefficient investment strategy could significantly impact your overall returns.
However, there are several ways you can invest tax-efficiently you might not be aware about.
Let’s have a closer look at a hybrid company structure that’ll help you minimise your tax bills and maximise your investment returns.
Some pitfalls of investing when you have a trading company:
If you intend to move your surplus capital into an investment company, you might have some problems along the way.
These might be:
- If you make investments in the name of your trading company, it could affect its status for CGT and IHT purposes
- Your trading company’s shareholders won’t qualify for Business Property Relief (BPR) if you die owning the shares
- If the trading company is ever sold, shareholders may not qualify for CGT business asset disposal relief (BADR)
If you want to avoid these problems, keep reading.
Family Investment LLPs With Limited Company Members
So far, we’ve seen examples of LLPs where the members are simply from one family.
But, what if we take things a step further?
This is where limited companies come into play.
For instance, if all of the members are higher-rate taxpayers, a company member can reduce the tax burden on the LLP’s income by allowing the allocation of a profit share to the company partner as the rules permit.
Also, a company member can act as a tax-efficient medium through which money is funnelled from a trading business to an investment portfolio, without triggering significant personal tax bills for the individuals concerned, as the following scenario illustrates.
Consider Blue Funnels Limited, a company that manufactures funnels for large ships and has amassed significant profits over the years.
The company’s owners do not want to pay out cash profits as dividends due to the potential tax implications.
Instead, they want to invest the surplus cash in a share and property portfolio.
However, buying investments in the name of Blue Funnels Limited could affect the company’s trading status for CGT and IHT purposes.
To avoid this, the funds are loaned from Blue Funnels Limited to an investment company set up specifically for this purpose.
The investment company is a member of a family investment LLP with the other individual family members.
Using the borrowed money, the investment company introduces capital into the LLP, which then buys the investments.
From the IHT standpoint, the loan from Blue Funnels Limited to the investment company is an asset that shareholders of Blue Funnels Limited won’t qualify for business property relief if they die owning the shares.
Nevertheless, being a passive asset, it shouldn’t jeopardise the overall status of the company.
Similar rules apply to maintain the trading status of Blue Funnels Limited for CGT purposes, which could be relevant if the company is ever sold, and shareholders qualify for CGT business asset disposal relief.
In summary, limited companies can be used as members of an LLP to reduce tax burdens and facilitate the flow of money from trading businesses to investment portfolios in a tax-efficient way.
The benefits of LLPs in terms of CGT and IHT planning we’ve included in Part One also apply here.
How this structure can benefit you
Family Investment Company LLPs, as you can see, can be part of a tax-efficient investment strategy if you’re a higher rate taxpayer.
Its main benefits include:
- reduce tax burdens
- facilitate the flow of money from trading business to investment portfolios
- avoid significant personal tax bills such as CGT and IHT
- avoid affecting your trading status
In conclusion, it’s clear that family investment LLPs should be considered as part of any family’s investment plan.
The potential tax advantages of this arrangement are truly remarkable and not well-known even among professional advisers.
The benefits of income tax and capital gains tax planning, IHT relief, SDLT planning, and tax-efficient use of surplus funds from trading businesses are just some of the reasons why family investment LLPs are a good option to consider.
Therefore, it’s highly recommended to seek professional advice and explore the potential advantages of family investment LLPs. To get started, simply follow the instructions below!
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Kind regards Ilyas