Post-sale planning: The Maximisation and Protection of Private Wealth following a Business Sale or Exit Event

Introduction

This article is the second in our series (following our pre-sale article, which is available here) in which we consider how investors and entrepreneurs generate and protect their personal wealth. The focus of this piece is on the entrepreneur who, following a liquidity event (the sale of their business, for example), wishes to consider the best way to manage their newly generated wealth from a tax and succession planning perspective.

Following a sale or similar event, there are numerous considerations and possibilities which a well-advised entrepreneur may contemplate to ensure the protection and tax-efficient passing of their gains to future generations. These include the making of outright gifts or gifts into trust, reinvestments in tax efficient business assets and often, as explored in this article, the formation of a Family Investment Company (FIC).  

What is a Family Investment Company? 

A FIC is a general term used to describe any private limited company which holds cash or investments for a family. The activities of a FIC are usually the holding of investment portfolios and investment property interests for the benefit of families (although it may also have a role in investing in other family entities).  

There are no unique restrictions on the activities of a FIC, however FICs must comply with UK Company law. Incorporating a private company in the UK can be done quickly and efficiently, and there is scope for flexibility as to governance terms and rules binding it. Indeed, what is special about a FIC are the bespoke elements of its articles of association and any shareholders’ agreement, which define how specific family members will benefit in their capacities as shareholders with regards to voting rights, dividends and capital distributions.

Structure and governance

The FIC’s articles of association (Articles) (a public document) and shareholders’ agreement (a private document) offer a bespoke structure that can be tailored to suit a family’s specific needs and concerns. The two documents together set out the governance rules and structure of the FIC.  Families can therefore prescribe for certain voting and dividends rights and other entitlements to capital.

Directors

The directors of a company have day-to-day control of a FIC and these powers can be entrenched and enhanced through the Articles. Directors have powers to, for example, declare interim dividends and make decisions as to how the FIC is run and what investments are made. Directors are however bound by their company law duties and must have regard to matters beyond the Articles. A common structure adopted, to ensure adequate control, is for parents/the entrepreneur to be the directors, to maintain control at board level.

Shareholders

The entrepreneur may also retain an element of control through ownership of shares with voting rights. Different classes of shares with different rights can be issued to the family members or other succession vehicles to ensure that income, capital and voting rights are appropriately structured. For example, the entrepreneur may have dividend/capital rights plus voting rights, with the remaining family members having no or limited voting rights. The relationship between shareholders should be governed by the private shareholders’ agreement to ensure that there are controls over how and to whom shares may be transferred, and to provide what happens to shares should a shareholder die.

For example, if the entrepreneur settled a trust prior to their exit event (as discussed in the first article in this series) that trust may be a primary shareholder in the FIC. The entrepreneur may well be a trustee of that trust; again, harnessing control. However, there can sometimes be a natural tension between shareholders and directors and so it can be common to see an entrepreneur take both roles in order to maintain control at each level.

Tax considerations

Complex rules of taxation apply to FICs which must be carefully considered before any structure is put in place to ensure the FIC is a tax efficient succession vehicle. These include considering and understanding the tax position of the company and its funding, the entrepreneur and the shareholders (especially as investments made via other structures also have their own tax advantages and disadvantages).

Post-Exit Gifting: Family Investment Company vs Trust

FICs are an attractive and flexible alternative to trusts, particularly for entrepreneurial clients used to operating a corporate structure. However, FICs are not for everyone and the business owner may simply prefer to gift their excess wealth and enjoy the proceeds of their sale.  When making gifts, it is still important to consider how this is done both tax efficiently and in such a way as to protect assets for the interests of their heirs.

In short, after an exit event, it is more difficult to place significant value into a trust, as the potential tax reliefs are lost unless reinvestment is made in assets qualifying for business relief within three years of disposal. A business owner is therefore typically limited to gifting a maximum of £325,000 into trust before incurring an immediate IHT charge.  However, such a gift could be useful in, for example, funding a grandchild’s education tax efficiently and is worth considering.

There is no such tax limitation on outright gifts, although advice should be taken on what measures can be taken to protect these and depending on the value there are wider considerations for the recipients.

An entrepreneur may also consider reinvestment of their sale or exit proceeds prior to gifting, which may, after a number of years, allow them to consider the tax efficient gifting set out in our first note.

Other Matters

It is important that the selling entrepreneur takes appropriate advice both pre, and post, an exit event, such as complying with restrictive covenants (e.g. non-compete restrictions), considering personal tax points (e.g. in relation to earn-outs/ deferred payments) and ensuring that there are no limitations on them dealing with their exit event payment.  Advice taken pre-exit event is likely to optimise the entrepreneur’s position, particularly in relation to the creation of a trust, which can then be incorporated into a post-exit event FIC structure.  

How we can help you

With the expertise and extensive experience in both private client and corporate matters, Charles Russell Speechlys offers comprehensive and consolidated advice on all aspects of the creation and running of your succession structuring, whether this be by FIC, or otherwise, to ensure that any such planning achieves the desired objectives for your family.