Case Study Nº11
1/17/20243 min read
Client X Case Study Nº11
Brief:
Client X and his ex-wife own 9 properties jointly. His ex-wife has signed a document confirming that she has no financial interest in the properties.
Client X is living in a beach property owned by father. Father is on state benefits which are dramatically reduced as state knows he owns this property but derives no income from it.
If the property could be transferred from father to Client X, this may in some way assist the fathers ability to claim benefits.
Father is happy to pass ownership to Client X on condition that some funds be reserved for 3 of Client X's siblings or possibly Client X give up the right to the parental residential home.
Father and mother live in a debt free property value £Xk which Client X is happy to not have any share in on the condition that he would have ownership of the beach property.
Primary reason for structure:
To remove ex wife
To move asset from father’s name
To protect Client X’s children
To allocate one of the 7 properties to Client X’s life partner
To sell 2 or 3 of the properties to release capital which would allow for building a new home on for Client X to live in on one of the building sites.
Primary reason for structure in numerical order:
1.Asset protection
2. Legacy Preservation
3. Tax efficiency
4.Wealth management
Proposal:
The Beach house is gifted to Mr A’s children with Client X as the trustee.
A Family Investment Company (FIC) is formed with seven classes of shares & director loan facility;
A. Voting shares, nominal value common shares with all the voting rights.
B. Redeemable preference shares to be issued to reflect the current asset value.
C. Redeemable preference shares to be issued to reflect the capital contributions*.
D. Growth shares to hold the future value over the current asset value.
E. Nominal value dividend shares for Client X's life partner to receive a dividend.
F. Nominal value dividend shares for the Client X's son to receive a dividend.
G. Nominal value dividend shares for the Client X's daughter to receive a dividend,
H. Director’s loan equal to the personal capital contributions into the properties
(*The Class C & Directors loan facility give the flexibility to gift part of the initial investment/capital to the future generations if required.)
The FIC was formed with all the 1000 x £1 voting shares being issued to Client X therefore controlling 100% of the FIC, these being of nominal £1 value can be sold for £1 each or gifted to the father, siblings and children tax free if and when required.
Two subsidiary companies are formed with only 100 common shares all held by the FIC, this would be the entities that hold the legal titles to the 5 rental properties and one for the development sites once the conveyancing was completed. For the properties with mortgages, they can be held on trust until the mortgage term has expired, then the property can be transferred to the company, completing the conveyance.
The FIC then agreed to exchange the circa £Xm worth of properties for circa £Xm worth of fixed value redeemable shares in the FIC, (class B) to reflect the equity in the properties. This is held only in Client X’s name, not his ex-wife.
This exchange of shares is not monetary, therefore there is not Stamp Duty Land Tax (SDLT) on the transfer once completed. It is also important to note the value of the Client X’s estate was not gaining or losing, at this point, therefore there is no capital gains tax either, as the capital gain is rolled into the shares of the FIC.
Client X is the main director, we recommend a 2nd director of the FIC and subsidiaries holding the properties but as Client X had control of the voting shares, Client X will have the final say on any major financial decisions about the company like the payment of dividends to any class of shares.
A discretionary trust was formed to hold the class D shares (Future Growth shares) for the son and daughter plus future generations, which is expressed via the letter of wishes as well. Client X and maybe a sibling are the trustees, with other siblings as successor trustees if required, these shares have nominal value today, therefore are gifted tax free. There is also a shareholder agreement put in place in case of any future disputes or divorce to prevent any shares being sold outside the family.
The value of all the mortgages circa £Xm is reflected as a director’s loan*, as the mortgage terms expire, the company refinances the properties, paying down the director’s loan tax free to repay the mortgages in Client X’s name.
The properties can also be sold without paying capital gains tax or corporation tax.