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el butio

Company structure to pass portfolio to children

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Evening all,

 

I have set up a LTD co with myself as only director and shareholder at the moment as it was easy to do by myself and should satisfy everything from a Lenders perspective looking at my earnings etc.  I have no properties purchased through this SPV yet but want to crack on soon.  I have a wife and 2 infant children.  I would like to eventually pass on on the wealth created to my children when I pass away so my questions are?:

 

whats the best way to do this?

can I set them up as shareholders at this early age or wait until they're older?

Would it be a massive issue to change the structure once properties have been purchased?

 

If anyone could give me any recommendations or point me in the direction of someone who can that would be greatly appreciated

Many thanks

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On 10/02/2017 at 10:25 PM, el butio said:

Evening all,

 

I have set up a LTD co with myself as only director and shareholder at the moment as it was easy to do by myself and should satisfy everything from a Lenders perspective looking at my earnings etc.  I have no properties purchased through this SPV yet but want to crack on soon.  I have a wife and 2 infant children.  I would like to eventually pass on on the wealth created to my children when I pass away so my questions are?:

 

whats the best way to do this?

can I set them up as shareholders at this early age or wait until they're older?

Would it be a massive issue to change the structure once properties have been purchased?

 

If anyone could give me any recommendations or point me in the direction of someone who can that would be greatly appreciated

Many thanks

Hello, I have the same question as above, does anyone have any advice

kind regards

David

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Hi Both,

 

Have a listen to the Ask Rob & Rob episode 22. The text below is an extract from the notes on the podcast page. It seems a sensible approach but one you will need to have assessed by your financial advisor/ mortgage broker/ solicitor so that it doesn't have any effect on your ability to get a mortgage.

 

"The answer started with a big caveat, that The Robs aren’t experts in this field, and their suggestions should be accompanied by research of your own.

It then went on to suggest that you set a company up where 98% of your shares are in your children’s names – if you’re looking to pass wealth onto your children, that is. 1% of the shares should then be in your name, and the other 1% in your partner’s name. These shares are controlling shares, and are the ones that allow you make all the decisions. The 98% are non-voting shares, leaving you in control.

Then when the portfolio comes to be passed on, inheritance tax won’t be an issue. Take this information to your tax advisors; they should be able to run with that."

 

Ben

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Thanks for the reply Ben.  I did listen to this after posting (good old podcast has everything somewhere!)  I will look into this and update as/when i find any more information.

Regards

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Hi Simon,

 

i found the article quite enlightening.   Just was left wondering in terms of dividends in order for you to get money out of the company.   I live in Hong Kong, and about to set up a similar Ltd as what Ben K extracted from Rob&Rob podcast.  I have read that since Im not a UK citizen/investor, Im not to pay tax on dividents even if it surpasses the £5K tax free limit.  Is this correct?   

 

Also in one of your company's articles read that when starting the company the initial capital will be set up as a loan(hope I understood correctly).  If that is so, is there any tax to the initial capital?   

 

Thanks, 

 

Luz

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Hi Luz

 

If you are overseas and in receipt of any UK income then you may not be taxed. It depends on your domicile / residence. If live abroad then you need to be out of the UK for a period of time and not have many ties to the UK for income to be tax free. This are is rather complex that cannot be dealt with reasonably on a forum.

 

The loan is a debt, which may be paid back to the company owner tax free any time.

 

Hope this helps

 

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I have a similer situation but don't want to have a limited company and my children are adults. Can I do this as a four way partnership? And if so, can I buy property in a company name or woudl it be in the four names? Any other complications from having this partnership?? Any and all advice appreciated.

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As I understand it, here is the rough idea for passing along a limited company while minimising IHT, and retaining control as long as possible.

 

Make 3 classes of shares in the company:

 

* (A) Shares that have rights over the capital (ie, owned property), but no income or management rights

* (B) Shares that have rights to income, but no capital or management rights

* (C) Shares that have management rights, but no rights to income or capital.

 

Initially you own the A, B and C Shares.

 

Later in life, "give", by way of a Potentially Exempt Transfer, to your children, all the "A" capital shares. With a PET there is no IHT to pay, provided you live for 7 more years (and it's a graduated scale if you die after 4 years, for example).

 

Now you still have full control over the company (the "C" management shares) and rights to any income ("B" income shares). So you still control the company and the income.

 

There is still some value in your estate - the B + C shares aren't worthless, but that value is negotiable.. and the vast majority was the A shares anyway.

 

Gradually give children the income shares too, as appropriate, to further minimise what's in your estate for IHT purposes.

 

 

This is the system also used for so called "Family Investment Companies" or "Personal Investment Companies" - if you google those terms you'll find tax and legal firms who can set them up for you.

 

 

If you don't have a limited company, you can simply give the property to your children, which is a PET provided you live for another 7 years. You can't still benefit from it though, so you can't "give" them your house and continue to live in it rent free, or give a rental property and continue to collect rent.

 

 

It's also possible to buy an insurance policy that will pay the IHT bill if you die before the 7 year PET period expires.

 

 

Hope this is useful. I'm not a lawyer or tax specialist, just someone considering doing a bunch of property BTL investment, and have researched suitable tax wrappers a bit.

 

 

 

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Hi Mr Jones, 

that's helpful thank you.

I found these resources which are informative

 

http://www.mills-reeve.com/familyinvestment/

 

Handy comparison of individual vs company ownership

http://www.rossmartin.co.uk/land-a-property/1588-buy-to-let-ownership-personal-or-company

 
Random example Family Investment Co - 
found by searching for keywords and a company with the SIC code that mortgage brokers recommend.
So this includes the Articles of association for such a company, in case someone wants to get a look at what a lawyer probably charges a fortune to draft for you.
 
 
Importantly, I believe that some mortgage lenders won't loan to a company which has shareholder that's a trust. I don't know for sure, but that's a key snag. The trust would be used for children (minors) to own the Class B/ C shares.

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I've spoken to my (excellent) mortgage broker Stuart Phillips about this, and my accountant, and here's a few things I've learned.

 

My three kids are all under 18. That means they'd need to own their shares via a Trust. Kids can't be parties to a loan, nor Directors. Whilst it is lawful for kids to own shares, most people do it via a Trust for a variety of reasons (outlined here).

The Family Investment Company (FIC) method is great if you have adult children, because the Trust issue can go away.

 

From the surface, an FIC looks like any other Limited Company. Most lenders' underwriters don't look at the Articles of Association, but instead the Directors and Shareholders. So the underwriters will be fine with it, and I'd be eligible for loans (as long as the SIC is right).

 

However - currently, because many Lenders are new to Limited Company loans for BTL, there's not a lot of certainty about whether a lender's lawyers will be OK with a Trust as a shareholder or an FIC structure. They might reject it. You won't find out for quite a while into the loan process, either. That means there's uncertainty. Over the next year, there will be more experience and precedent in the market from lenders handling different company structures, and therefore it'll be more predictable whether a particular lender's lawyers will allow it, or not.

 

So, what I'm thinking is that between today and when my kids are 18 - let's call this the "young family phase" - I'll buy houses through a normal off-the-shelf Limited Company.

The risk I'd like to have mitigated is the tragic simultaneous death of my wife and I. It's only in that circumstance that we'd have an unplanned IHT problem. If my kids had owned some of the assets via the FIC, I would have reduced this exposure.

If one of us dies first, the survivor needs to start gifting (perhaps into Trusts), then survive seven years.

 

So instead I'll minimise IHT risk by:

  • having lot of loans, since the debt to buy the houses reduces the total assets which are tested against the £750K threshold.
  • I'll make sure my life insurance is set up to be paid outside of IHT, so it can help cover any tax hit, and is not itself added to my assets and therefore exposed to IHT.

When I'm out of young family phase, I'll possibly re-incorporate the business into a Family Investment Company. However, I don't need to decide that now - it's at least five years away. I'll defer the decision because I can work it out at the time, in light of the then-prevailing HMRC landscape.

 

Whilst I could  use a Family Investment Company during the young family phase, today it'd have to be without any of my kids as shareholders. Setting it up now would save me a future reincorporation, because I could just gift the kids their special share classes in the future. However I'd have to pay for legal and accounting advice now, and then not actually get any benefit from it until either (a) the kids are old enough, or (b) the mortgage landscape clears up in a year or so and makes me certain they could be shareholders via a Trust without compromising my access to mortgages.

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