Family Financial Vehicle

Pipz

Hi all,

As above, I wasn't quite sure where to place this topic, but I wondered if such a financial instrument existed where funds can be held and income generated that subsequently is paid out to family members that wouldn't incur anything other than income tax implication for the individuals receiving depending on their own position?

Thoughts welcome!

purdyoaten2

I think that you will have to provide an example - that’s very vague and difficult to ascertain where you are going with this scenario.

Brie

I would have thought that if there is income there is going to be tax.  Maybe it will be paid by the financial vehicle or by the receiving individuals.   And this sounds like it might be for a substantial amount of £££ so I wouldn't be taking too much notice of what a bunch of finance boffins on the internet think but go to a qualified IFA and tax accountant instead.  

Pipz

purdyoaten2 said:

I think that you will have to provide an example - that’s very vague and difficult to ascertain where you are going with this scenario.

That's the thing - this is exploratory in nature as I have no particular example. The theory is something that family members could pay into that the proceeds (be it interest from cash / dividend income) would pay out at a set period that would avoid any IHT implications - a family wealth fund if you will. Sorry I can't be more specific, the idea is fledgling but the intent is to create an income stream that can benefit all family members and augment their income.

Grumpy_chap

So, this is to do with minimising IHT liability.

First things first.  Will the individual's (couple's?) estate being sufficiently large that IHT is a concern?  Remember the allowances are quite large, especially when residential allowances are considered.  Plus, what will the individual's spend to enjoy their remaining years to the best style they are able?  They may well choose to spend to diminish the value of the estate.

Secondly, you seem to be talking of some kind of Family Trust.  These tend to be only applicable to UHNWI's.

Subject to the age of the individual(s), they may be able to pay funds into a DC pension (subject to rules and limits), which is then outside the estate should the inevitable happen and the fund not fully expended by that time.  It's also flexible in that the originator can also draw those funds to meet their own needs prior to departure.

Pipz

Grumpy_chap said:

So, this is to do with minimising IHT liability.

First things first.  Will the individual's (couple's?) estate being sufficiently large that IHT is a concern?  Remember the allowances are quite large, especially when residential allowances are considered.  Plus, what will the individual's spend to enjoy their remaining years to the best style they are able?  They may well choose to spend to diminish the value of the estate.

Secondly, you seem to be talking of some kind of Family Trust.  These tend to be only applicable to UHNWI's.

Subject to the age of the individual(s), they may be able to pay funds into a DC pension (subject to rules and limits), which is then outside the estate should the inevitable happen and the fund not fully expended by that time.  It's also flexible in that the originator can also draw those funds to meet their own needs prior to departure.

Somewhat - but the intended vehicle would sit outside of any individual's direct entitlements, something that could exist and pay out to generations whilst sitting outside of any individuals estate / liability.

Perhaps the most applicable thing is a family trust - whilst figures are arbitrary, if such a fund had £1M worth and 5% AER - I'd envisage the same could pay out £50K annually shared equally between family members. 

The objective being that over time such a fund could grow to such an extent that it could provide a significant income to individuals with no other implication other than tax at said individuals marginal rate.

Grumpy_chap

It will be far easier for appropriate (and hopefully correct) advice to be given if you shared more detail.  This is not to  pry, but the danger with your current vagueness is that comments may be made that are obviously incorrect for the situation you are considering.

From who is the funding originating?
Who will benefit from the funding?  (relationship(s) to the originator)
What is the proposed fund value to a trust?  (£1M?)
What is the total wealth of the originator?
Is the originator an individual, or a couple?

The thing is, as I mentioned above, Family Trusts are really only applicable to individuals of UHNWI status, which simply having £1M is not.  Someone of UHNWI status can engage the services of their retained advisors to guide this process and obtain far more reliable information that can be obtained from strangers on the internet filling a large number of blanks.

Pipz

Grumpy_chap said:

From who is the funding originating?
Who will benefit from the funding?  (relationship(s) to the originator)
What is the proposed fund value to a trust?  (£1M?)
What is the total wealth of the originator?
Is the originator an individual, or a couple?

You're not prying at all! As mentioned this is explorative:

From who is the funding originating?
Once setup, any family member could pay into the fund at any given time, it would pay out annual with proceeds being split between all family members but the overall capital would maintain (and ideally grow).

Who will benefit from the funding?  (relationship(s) to the originator)
Any family member (the list being adjusted as the family grows / shrinks), whilst someone would set the fund up the idea would be the fund continues generationally.

What is the proposed fund value to a trust?  (£1M?)
Variable really, depending on rate of paying in / growth 

What is the total wealth of the originator?
Is the originator an individual, or a couple?

For assumptions sake (not that I'm reluctant to disclose it's more I can't see hte bearing of the same when considering the answer to the first question) I'll say originators are a couple with net worth of £1M (inc property) therefore under the £1M IHT threshold who'd contribute any funds over the £1M into said fund rather than into a SIPP / other personal vehicle. 

I appreciate this is abstract so thank you for bearing with!

Flugelhorn

there is the option of just giving excess income to the nearest and dearest on a regular basis, the recipients wouldn't have to pay income tax and it would  stop IHT liability from increasing 

Grumpy_chap

This is "abstract" as the OP refers, or "muddled" as I would describe it based upon what has been mentioned so far in the thread.

If this is all to do with the OP's parents and seeking to avoid IHT when the parent's move to another place, then for a couple with an estate at around £1M, considering of a Family Trust is seeking a complex solution where KISS (Keep It Simple) will be more appropriate.

Albermarle

Pipz said:

Grumpy_chap said:

So, this is to do with minimising IHT liability.

First things first.  Will the individual's (couple's?) estate being sufficiently large that IHT is a concern?  Remember the allowances are quite large, especially when residential allowances are considered.  Plus, what will the individual's spend to enjoy their remaining years to the best style they are able?  They may well choose to spend to diminish the value of the estate.

Secondly, you seem to be talking of some kind of Family Trust.  These tend to be only applicable to UHNWI's.

Subject to the age of the individual(s), they may be able to pay funds into a DC pension (subject to rules and limits), which is then outside the estate should the inevitable happen and the fund not fully expended by that time.  It's also flexible in that the originator can also draw those funds to meet their own needs prior to departure.

Somewhat - but the intended vehicle would sit outside of any individual's direct entitlements, something that could exist and pay out to generations whilst sitting outside of any individuals estate / liability.

Perhaps the most applicable thing is a family trust - whilst figures are arbitrary, if such a fund had £1M worth and 5% AER - I'd envisage the same could pay out £50K annually shared equally between family members. 

The objective being that over time such a fund could grow to such an extent that it could provide a significant income to individuals with no other implication other than tax at said individuals marginal rate.

I am not an expert but I would guess that a family trust would be expensive to run. There would be initial and ongoing fees for legal advice and running the trust, producing tax returns etc. Probably this would soak up at least some of the 5% AER.
Then if the trust had to be dismantled at some point, or there were disputes, then even more fees and a lot of headaches.