Given the constantly evolving nature of the tax regime in the UK, it would be surprising if, at least in the medium term, there were no changes to the tax rates, or taxation principles, applicable to FICs. Of course, what is far harder to predict is exactly what the nature of those changes will be.
Shares as assets
When a discretionary trust is used, the beneficiaries are owed fiduciary duties by the trustees but will not have a defined right to participate in the assets of the trust. By creating a FIC and giving shares to junior members of the family, the parents are putting a defined asset in the hands of those family members.
To an extent the effects of this can be mitigated by, for example:
- limiting voting/control rights attaching to those shares;
- making the economic rights attaching to a class of shares as non-specific as possible, so that it is difficult to put a specific value on the shares or for the holders to claim a specific level of entitlement
However, this does not deal with the fundamental point that as soon as individuals own shares they benefit from minority shareholder rights, such as the right to raise a claim of unfair prejudice if they feel the company’s affairs are being conducted unfairly.
Giving junior family members a separate class of shares also means that changes to the rights of that class cannot be made without the consent of the holders of that class, even if they don’t otherwise have voting rights.
Furthermore, although it is possible to provide (as most FICs do) for different levels of dividends to be declared across different classes of shares, it is not possible to declare different levels of dividends on shares within a particular class.
Every family member holding shares of a particular class is entitled to their pro rata share of the dividend, in contrast to the flexibility offered by a discretionary trust.
What happens on a divorce?
Divorce of parents/settlors
Depending on the way a FIC is set up, if the parents divorce, there is no reason for them not to retain their shares and control, although query how practical it will always be for them to co-operate.
Assuming their shares have no economic entitlement it is unlikely they would be taken into account for the purposes of assessing the size of the marital estate.
Divorce of junior family member
