Wedding plans
Soon after moving in together, Eric and Jing announce to Peter and Jane that they had decided to get married. Peter, then working for his father, insisted that if Eric intended to marry Jing they should put in place a ‘pre-nup’, at least to protect the family business. Eric agreed to seek legal advice and took the opportunity to reflect on his succession plan for both his business and his personal wealth.
Pre-nuptial aggreements in the UK
A prenuptial agreement (or “pre-nup”) is a document by which the future spouses set out how their assets will be divided in the event that the relationship breaks down.
Although pre-nuptial agreements are not automatically binding in the UK, following recent legal developments, the UK courts are likely to give them effect where:
- each party freely entered into the agreement without undue influence or pressure,
- there was full and proper financial disclosure, and
- each party received independent legal advice on the implications, unless in the circumstances at the time of divorce it would not be fair to hold the parties to their agreement.
Eric disclosed to his lawyer that whilst he had made some contributions into a pension scheme, most of his wealth outside EW Ltd was held in cash and an investment he had been recommended by one of his celebrity clients.
His lawyer suggested Eric could consider transferring some of his shares in EW Ltd to his children before the marriage, especially if ultimately he wanted them to carry on the business. Although Eric agreed the idea had merit, he ruled out transferring any of his wealth to his children immediately, as he considered they were still too young and was concerned that whatever he gave them could be at risk if they themselves were to get married and then divorced.
Eric also ruled out transferring any of his shares in EW Ltd into a trust, notwithstanding that the transfer of the shares would benefit from the generous reliefs available on a transfer of qualifying business assets, because that would mean the trustees would decide how to vote the shares held within the trust and might interfere in his management of the company. Eric did not want to lose control.
Eric was however interested in his lawyer’s idea of creating a family investment company into which he could lock away the accumulated cash he did not anticipate needing to support his and Jing’s expected lifestyle. This could then be invested for the long term benefit of his family.
Family investment companies
Low rates of UK corporation tax are making family investment companies (“FICs”) attractive investment wrappers in place of trusts, insurance bonds and private unit trusts.
Entrepreneurs understand companies and often embrace the idea that they can retain control, which is often lost with other investment wrappers.
Most dividends received by the FIC will be tax exempt and profits retained within the FIC will be subject to corporation tax (20% currently) rather than income tax (up to 45% for individuals).
Each FIC is designed on a bespoke basis for the individual setting it up.
A FIC is formed by incorporating a company and then placing money into it which is invested by the FIC. FICs are often funded by way of a loan, as this can usually be repaid without incurring a tax charge.
The entrepreneur can be the sole shareholder and the director and an external investment adviser appointed to manage the money. Over time the entrepreneur can spread the shares amongst his family in a tax efficient manner.
Health warning
Whilst the use of a FIC offers tax deferment rather than tax avoidance (as tax will potentially be payable on any dividends paid by the FIC to its shareholders) specific legislation targeting FICs could be introduced which could remove some of the advantages which have arisen due to the differential between the rates of corporate and personal taxation.
Wedding plans
Eric decided to incorporate the W Family Investment Company Ltd, of which he would be the sole shareholder, and to finance it partly by way of loan so that he would have access to additional funds if required. His plan was to involve his children gradually; he would start by inviting them to attend meetings with investment advisers so that they could learn and experience running money and then transfer them shares only once he considered they were more knowledgeable. He thought they might initially receive non-voting shares so he could retain full control of the company.
Eric and Jing then finalise their pre-nuptial agreement. Eric agrees to give Jing a half share in the London house they occupy and to ensure that her reasonable needs will be met in the event the marriage breaks down; neither will bring a claim against the other’s business interests and Jing will not claim any interest in W Family Investment Company Ltd. They agree to make wills reflecting these arrangements.
Eric and Jing get married with little fanfare at their local registry office. Peter and Jane agree to be witnesses.
To read part one of this series by Edward Stone on wealth and succession planning, click here.
