back to Autumn/Winter News homepage >

Family Benefit Trusts

Or how to solve the nightmare of surplus cash in your trading company.

What nightmare, you ask?

Take a look at the case study to get a flavour for the sort of terror the Revenue could bring down upon you if you are in anything like the same position.

We have a lot of clients who have allowed cash to build up in their companies.  Typically they do not need the cash to spend and are reluctant to pay any further tax on extracting it, so there it stays.  Worse still, it is nearly always in the bank instead of earning any real investment return.

Let me remind you of the horrors in store.

• Taper relief may already have been prejudiced by having substantial non-trading cash balances.
• It may not be possible to hold-over the tax on a transfer into a trust (or anyone else other than your spouse or registered civil partner).
• The surplus cash itself is exposed to a risk of IHT at the full 40% rate.
• Even the value of the trade may lose the IHT exemption in some cases.
• It will be liable to at least a further 18% tax on a sale of the shares or a liquidation after 5 April 2008, and maybe 25% tax instead.

Family Benefit Trusts (FBTs) are a robust and non-aggressive way to extract the cash tax-free from the company.  It is transferred to a trust established for you and your family with the following features:

• No income tax or National Insurance contributions on extraction.
• The cash comes straight off the company’s balance sheet, reducing the gain inherent in the shares themselves and is no longer available for creditors.
• It goes into a discretionary trust without regard to the nil-rate band, which normally limits the amount that can be put into trust.
• The fund is outside of the estate of any individuals and so is not liable to IHT on the death of any beneficiaries.
• There is a potential charge to IHT every 10 years at a maximum of 6% - it takes the Revenue 70 years to be up on the deal – and even that can be largely mitigated.
• Capital growth in the fund is tax-free, and income is largely tax-free (some UK sources of income may have basic rate tax deducted at source).

Contact Nick Scull at nscull@garbutt-elliott.co.uk if you would like to find out more.