Poached eggs on trust?

Introduction

 

I was recently having a late brunch with someone I know well (identity concealed to protect the innocent, of course).

Eggs over easy

 

The chap I was having a discussion with wanted to talk about tax planning. No surprise there.

 

But, unusually, this was not about tax planning he was involved in personally.

 

Well, not directly.

 

Our discussion highlighted some of the trickier, non-technical issues around family tax planning – particularly cross-generational planning  generations and / or attitudes to wealth and tax planning, and so I thought I would share it with you

Hard boiled

 

My brunch “date” seemed a little agitated about things so, whilst I am not usually keen to get involved in friends or family tax planning, I asked him to go on.

 

It turns out that his father in law (FIL) was an ‘arch tax planner’.

 

He had had a long career in business and now spent his retirement somewhere between the Rotary club, and twiddling with his trusts and family investment company.

 

Everyone needs a hobby, I guess.

 

FIL undoubtedly had a ‘bullish’ approach to tax planning. And, to be fair to him, he had some demonstrable success over the years.

 

Indeed, the guy actually features in one of my favourite tax cases (yes, I do have a list of favourites. A niche section of Pinterest, granted!)

 

He had informed my friend that he had decided to tweak the FIC in favour of my friends’ kids.

 

Now, my friend is remarkably well-educated and undoubtedly smart. However, he has limited knowledge, and perhaps even less interest, in financial matters.

 

And as for tax, well that is even further down the list of things that hold his attention. Who knew?

 

As such, he has no understanding of either family investment companies, trusts or their underlying investments.

 

From the sounds of what my brunch date was saying his FIL had what appears these days, to be a relatively common FIC structure. Albeit some of the shares in the FIC, along with some other investments, are held by a trust.

Smashed avocado?

 

So why was my friend concerned?

 

Well he has a bit of a profile.

 

As such, reputationally, and for his career, it would not be good for him to be linked to any kind of tax planning story.

 

I suspect this was the main concern yet, as often is the case, this was left towards the end of our conversation.

 

So, was he right to be worried?

 

My own view is that although the FIC is clearly flavour of the moment with law and accountancy firms at the moment, it is potentially only a matter of time before HMRC focuses its beady eyes in this area again. Especially when it comes to children with an interest in companies in which they have no input and any convoluted rights.

 

Particularly, as this is one of the few ‘set piece’ arrangements left on the shelf… and there is a lot of potential tax to raise if there is a crackdown.

 

Let’s be honest, the tax planning tide only moves one way.

 

And perhaps HMRC will be right to pay FICs a little bit more attention. Indeed, I was recently told a funny – but slightly scary – story by a contact about a lawyer that had learned how to ‘do’ FICs by searching for the term “Family Investment Company” at Companies House. He then printed off, cut and shut, and used the Articles of Association he found.

 

If you think this is an urban myth, take a look at Companies House for yourself. It’s hard to believe that so many entities have stamped themselves in this manner.

 

A media furor in 5 or 10 years would be problematic for a lot of people… and, in my opinion, is not unlikely.

 

Sunny side up?

 

So, my friend was worrying about a structure set up by someone else…that he didn’t understand… didn’t want… and felt was a ticking time bomb.

 

As I have said, I’m not usually very keen to get involved with advising friends and family but, sensing the anxiety in the air was thicker than the porridge on offer, I offered to have a call with all parties.

 

He was clearly relieved..

 

Of course, like many families, my friend hadn’t voiced any of these concerns to my FIL. FIL probably thought he had done nothing wrong. He would likely be mortified that we were having this conversation.

 

Quite frankly, we all felt a bit scrambled.

The point of… the…errr…egg

 

Like cooking breakfast eggs, the success of building any wealth structure lies not just in the skill of the chef but in understanding the preferences of those at the table.

 

Just as some prefer their eggs poached, others might favour them sunny side up, scrambled, or hard-boiled.

 

Of course, some people might prefer muesli*.

 

Planning for cross-generational wealth demands a similar approach.

 

Get everyone around the table so the chef knows exactly what needs cooking.

 

 

*OK, no one prefers Muesli – but you get the idea.

If you have any queries, comments or thoughts on this article then please get in touch.