Inheritance tax (IHT) is a major issue for anyone who is UK domiciled or has assets in the UK. UK-domiciled individuals are subject to IHT on their worldwide estate at a rate of 40%. Gifts to an individual are potentially exempt transfers (PETs) provided that the donor survives for seven years after making the gift and no longer continues to enjoy the gifted asset.
Properly structured, an FIC may result in the elimination of the IHT liability, while also enabling a donor to enjoy some degree of control over the asset concerned.
At the outset the FIC should plan to issue multiple classes of shares, although it is important for the donor to be the sole shareholder of all the shares (regardless of class) before any share reorganisation takes place.
A recommended structure may have the following characteristics:
• A shares – carry voting rights but not rights to income or capital
• B shares – may carry rights to income but not voting rights or to capital
• C shares – carry no voting rights or rights to income but all rights to capital
Upon incorporation, the donor will make a transfer of assets in exchange for becoming the registered shareholder of all share classes. There is no chargeable transfer because assets have simply been exchanged such that there is no resulting loss to their estate.
Thereafter the Class C shares can be gifted to family members. Class B income shares can be retained by the donor. The B shares may have a modest value but it would be minor compared to the value of the Class C shares.
The Class A voting shares will have little or no value but will allow the holder to control the FIC and therefore dictate what happens to its assets. As a result, the donor can continue to administer corporate assets without interference but will have given away the substantial value – which is contained in the Class C shares.
UK IHT can therefore be eliminated or reduced, provided that the donor survives for seven years after giving away the valuable Class C shares.