A Family Legacy, Built on Expertise …
When Mr & Mrs A embarked on their property investment journey, they were determined to secure their financial future. But after seeing their grandparents’ estates hit with hefty inheritance tax (IHT) bills, they realised that success was about more than just accumulating wealth—it was about protecting that wealth for future generations. They knew a robust legal and financial structure, compliant with HMRC’s rules, was essential.
They couldn’t navigate these complexities alone, so they turned to a team of experts to build their Family Investment Company (FIC), ensuring it would meet both their commercial goals and HMRC’s compliance standards.
The Share Structure: A Cornerstone of Planning
At the heart of Mr & Mrs A’s Family Investment Company was a share structure designed to balance control, succession planning, and tax efficiency, all while complying with HMRC’s requirements. The structure was key to transferring wealth to future generations without triggering immediate tax liabilities.
Here’s an overview of their share structure:
| Share Class |
Owner(s) |
No. of Shares |
Value/Share |
Voting Rights |
Dividend Rights |
Growth Potential |
Purpose |
| A Class (Freezer) |
Mr A |
380 |
£1 + share premium |
Yes |
Yes |
No |
Allows Mr A to retain control and receive dividends, while freezing value for tax planning. |
| B Class (Freezer) |
Mrs A |
380 |
£1 + share premium |
Yes |
Yes |
No |
Similar to A class, but for Mrs A. |
| C to Y Class |
Jointly owned by Mr & Mrs A |
10 per class |
£1 |
No |
Yes |
No |
Designed for future gifting to family members who may become involved in the business. |
| Z Class (Growth) |
Discretionary Trust for Mr & Mrs A’s bloodline |
10 |
£1 |
No |
Yes |
Yes |
Growth shares held in trust, accruing value for future generations. |
Why So Many Share Classes?
The share structure was deliberately crafted to offer flexibility for wealth transfers while protecting control over the business. Here’s why Mr & Mrs A made these choices:
- Freezer Shares (A & B classes): These shares are held by Mr & Mrs A and have full voting and dividend rights, but their value is “frozen.” This means that any future growth in the company’s value is locked out of their estate for IHT purposes, helping reduce tax exposure while maintaining control.
- C to Y Shares: These freezer shares are designed for future gifting to family members. Importantly, these shares only carry dividend rights, not voting rights, allowing family members to share in the company’s profits without influencing decision-making. Family members who receive these shares must actively contribute to the business, in line with HMRC’s rules around income shifting and dividend justification.
- Z Growth Shares: Held in a Discretionary Trust for the family’s bloodline, the Z shares are designed to capture the future growth of the company. These shares carry no voting rights, ensuring that control remains with Mr & Mrs A during their lifetimes, but allow their descendants to benefit from long-term capital appreciation without increasing IHT liabilities.
The Team Behind the Structure: Experts Ensuring Compliance
Establishing this FIC structure wasn’t just a matter of drawing up documents—it required the involvement of several professionals to ensure compliance with HMRC’s rules and to align the structure with Mr & Mrs A’s long-term goals. Here’s how each professional contributed:
1. Barristers: Structuring and Legal Documentation
The foundation of the FIC was built by Mr & Mrs A’s barrister, who drafted the necessary legal documents to ensure the structure was robust and compliant with both company law and HMRC guidelines.
- Shareholders’ Agreement and Articles of Association: These bespoke documents defined the rights of each share class, including drag-along and tag-along rights. These provisions protect the integrity of the shareholding arrangement, demonstrating to HMRC that the shares serve a genuine commercial purpose, not just a tax-saving device.
- Freezer and Growth Share Terms: The barrister also ensured that the freezer shares (A & B classes) and growth shares (Z class) were structured in line with HMRC’s rules, particularly around inheritance tax planning. Freezing the value of the A and B shares while placing future growth in the Z shares within a Discretionary Trust helped mitigate IHT exposure.
2. STEP-Registered Solicitors: Estate and Trust Planning
The involvement of a STEP-registered solicitor was crucial for setting up the Discretionary Trust that would hold the Z growth shares.
- Creating the Discretionary Trust: The solicitor ensured that the trust was structured to protect family wealth, with the Z shares capturing future business growth. This trust kept the wealth within the family while protecting it from divorce, creditors, or mismanagement.
- Wills and Lasting Powers of Attorney: The solicitor also helped Mr & Mrs A establish Wills and LPAs, ensuring that control of the business would transfer smoothly to the next generation in the event of incapacity or death. This planning helped ensure continuity and compliance with both tax law and company law.
3. Accountants: Tax Compliance and Ongoing Management
The accountant played a vital role in ensuring that the structure met tax compliance requirements, particularly around Corporation Tax, Capital Gains Tax (CGT), and Inheritance Tax (IHT).
- Incorporation Relief (TCGA 1992, Section 162): The accountant managed the process of claiming Incorporation Relief, deferring the CGT that would have been triggered by transferring the property business into the FIC. This was crucial in ensuring the transfer was tax-efficient and met all HMRC criteria.
- Managing Dividend Payments: The accountant ensured that dividend payments to family members reflected genuine commercial involvement, preventing any suggestion of income shifting. By maintaining detailed records and basing dividends on actual contributions, the accountant helped Mr & Mrs A comply with HMRC rules around dividend distribution.
4. Mortgage Brokers: Specialist FIC Financing
Securing the right finance for the FIC was another key piece of the puzzle. Mr & Mrs A worked with a specialist mortgage broker who understood the complexities of lending to Family Investment Companies.
- Securing Commercial Finance: The broker helped refinance Mr & Mrs A’s properties within the FIC, ensuring the loan terms aligned with the company’s long-term objectives. This was essential for maintaining liquidity and providing flexibility for future investments.
- Collaboration with Conveyancing Solicitors: The broker worked closely with conveyancing solicitors to ensure the legal aspects of transferring property into the FIC were managed efficiently, avoiding any potential issues with Stamp Duty Land Tax (SDLT) or mortgage terms.
5. Conveyancing Solicitors: Property Transfers
The transfer of Mr & Mrs A’s properties into the FIC was handled by specialist conveyancing solicitors, who ensured that all legal aspects of the transaction complied with SDLT rules and company law.
- Property Title Transfers: The solicitor ensured that all property titles were correctly transferred into the FIC, while maximising SDLT reliefs. This required careful management to avoid unnecessary tax liabilities and ensure that the transfers were legally sound.
Property118: Orchestrating the Professionals
Throughout the process, Property118 acted as the central coordinator, ensuring that all professionals worked together seamlessly.
- Strategic Oversight: Property118 ensured that each adviser’s input aligned with Mr & Mrs A’s long-term goals. By orchestrating the efforts of the legal, tax, and finance professionals, Property118 helped ensure the FIC structure was both compliant and commercially sound.
- Commercial Justification: Property118’s expertise was critical in ensuring that the dividend structure, share transfers, and business operations had clear commercial justifications. This approach helped safeguard the company from any potential HMRC challenges related to income shifting or tax avoidance.
A Legacy Built on Compliance and Expertise
By working with their professional team, Mr & Mrs A didn’t just build a company—they built a legacy that could withstand the scrutiny of HMRC and support their family for generations. Their Family Investment Company was meticulously structured to ensure compliance with tax law while allowing their children and grandchildren to benefit from the company’s growth.
If you’re looking to create a similar structure, Property118 can guide you through the process, helping you build a compliant and future-proof business.
To book an initial 60-minute consultation with a Property118 consultant, use this link.
Next Steps: Implementing YOUR Property Investment Structure
Did you know, over the last 7 decades the average UK residential house price grew by more than 140 times, from just over £1,800 in 1952, to over £260,000 by 2024?
(Source: Nationwide House Price Index April 2024)
If history repeats itself over the next 70+ years, the difference between the right and the wrong property ownership structure could make a difference of millions of pounds, even for investors who own just one rental property.
You may not be alive 70+ years from now, but there’s a possibility that your children will be and an even better chance that your grandchildren and great grandchildren will be.
We all have a moral obligation to improve the quality of our lives and those of our families.
That journey begins here!
