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Personal investment companies

Including Financial Independence and Retiring Early (FIRE)
Moosehoosenew
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Re: Personal investment companies

#354430

Postby Moosehoosenew » November 7th, 2020, 10:01 pm

Good to see a topic on this.

I was looking at circa 2 to 3 mill to invest in a PIC to mitigate IHT but felt this was on the low side to make it tax efficient.


I think the attraction is

inheritors cannot get the money too early( in case you need it, or they are feckless, or marry poorly)

The alternative is give the money away quicker, and provide the best guidance you can on how they use it?

I am applying a bit of plan B, but would love to create a vehicle that my children could take forward and nurture.

Other options, buy a farm free of iHT, seriously

Bagger46
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Re: Personal investment companies

#354471

Postby Bagger46 » November 8th, 2020, 8:53 am

Moosehoosenew wrote:Good to see a topic on this.

I was looking at circa 2 to 3 mill to invest in a PIC to mitigate IHT but felt this was on the low side to make it tax efficient.


I think the attraction is

inheritors cannot get the money too early( in case you need it, or they are feckless, or marry poorly)

The alternative is give the money away quicker, and provide the best guidance you can on how they use it?

I am applying a bit of plan B, but would love to create a vehicle that my children could take forward and nurture.

Other options, buy a farm free of iHT, seriously


We explored PIC a while ago, but in the end went for a mixture of giving some money away early, plus a close variant of your last option. IMHO, one cannot set conditions on the funds you give away, in our case we relied on the substantial effort we put into educating our children, and grandchildren, in all matters relating to numeracy, handling budgets and investment. So far it seems to have paid off.

I won’t give more details, seek professional advice if you are not highly qualified in such matters yourself. In our case it was an integral part of both our careers to deal with such matters anyway.

Bagger

Walkeia
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Re: Personal investment companies

#354554

Postby Walkeia » November 8th, 2020, 2:16 pm

hmm I wrote a long response here and the page took me to the login screen when I clicked submit and I lost it! Apologies I don't have time to re-write.

In a couple of sentences: the acid test is would I advise my younger self to do it - No. The Autumn press reports or normalisation of CT, CG, Dividend tax if true (and someone has to pay for the pandemic) mean there isn't much financial sense to it due to the double taxation - even if you were going to wait decades like I planned to.

Net I am strongly considering and probably will close my PIC resulting in mainly a waste of time and a small opportunity cost.

johnhemming
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Re: Personal investment companies

#354590

Postby johnhemming » November 8th, 2020, 5:13 pm

I think with a farm you need to actually farm it to get tax benefits, just renting it out doesn't count.

genou
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Re: Personal investment companies

#354595

Postby genou » November 8th, 2020, 5:33 pm

johnhemming wrote:I think with a farm you need to actually farm it to get tax benefits, just renting it out doesn't count.


It has to have been in use as farm land for longer, I think, but rented out is not excluded. Unless it's changed since I last looked.

As an aside, woodland is interesting. If you own any woodland that is classed as commercial it attracts 100% BPR after two years. There is ( or was - I don't follow this that closely ) a strong argument [ that I have known succeed ] that adding additional woodland to land owned for more than 2 years is an expansion of an existing business, and it all qualifies for BPR regardless of you buying the additional woods from your death bed.

Moosehoosenew
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Re: Personal investment companies

#355012

Postby Moosehoosenew » November 9th, 2020, 8:33 pm

Thanks for thoughts on my post.

I am inclined to think that 2 or 3 mill, not enough to justify costs of PIC and involvement of possible trustees, of whom I have no control on death.

So what would be enough, to justify it is the question, perhaps above 5 mill, definitely, 2.5 to 5 worth considering. But other factors, your health, solid marriage, good or feckless children.

I have been mulling this for a couple of years and still struggling to make any sense of it, meanwhile just trying to move cash down to reduce the problem. My children quite good and not partic feckless but still young and I would like them to feel that they have made their own way.

First World problem

TUK020
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Re: Personal investment companies

#355116

Postby TUK020 » November 10th, 2020, 9:45 am

Moosehoosenew wrote:Thanks for thoughts on my post.

I am inclined to think that 2 or 3 mill, not enough to justify costs of PIC and involvement of possible trustees, of whom I have no control on death.

So what would be enough, to justify it is the question, perhaps above 5 mill, definitely, 2.5 to 5 worth considering. But other factors, your health, solid marriage, good or feckless children.

I have been mulling this for a couple of years and still struggling to make any sense of it, meanwhile just trying to move cash down to reduce the problem. My children quite good and not partic feckless but still young and I would like them to feel that they have made their own way.

First World problem

If you can fund out of income, regular transfers into ISAs and pensions for them can move a goodly chunk out from IHT.
Also set up trusts for each child, with these as the beneficiary of your SIPP (if you have one). The children can then borrow from the trust for the purposes of property purchase (I believe the loan would not be part of the estate to split on a divorce).
Need to redo our wills and tidy things up ourselves

johnhemming
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Re: Personal investment companies

#355138

Postby johnhemming » November 10th, 2020, 10:25 am

Moosehoosenew wrote:involvement of possible trustees,

My understanding of a PIC is merely a limited company that holds investments. I am not sure where trustees come in.

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Re: Personal investment companies

#355445

Postby Charlottesquare » November 11th, 2020, 9:33 am

johnhemming wrote:
Moosehoosenew wrote:involvement of possible trustees,

My understanding of a PIC is merely a limited company that holds investments. I am not sure where trustees come in.


They don't.

The other point not raised on this thread is the ability to set up with the kids as the main shareholders, parents lend the company the money to say buy shares/investments, company uses dividends received from say shares/investments to gradually repay the loans from parents over time (so no tax on extraction) and the only asset in parents' estates on their death are the balances of the loans they made. If you do not fancy kids having voting control some nifty work with share classes might be useful (Freezer/Growth shares). This in effect allows parents to pass all future investment growth to the children whilst ensuring they have a sum of money they can draw upon, if say the investments yield 4% and all dividends received used to repay loans then parents have a tax free cashflow for up to 25 years.

Edit- Investment Trusts rather than shares (Avoid Unit trusts etc as can have nasty corporation tax implications re profit recognition within a company) can greatly reduce the incidence of corporate actions inadvertently triggering CT bills when not wanted and can often be purchased on a buy and forget basis.

TUK020
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Re: Personal investment companies

#355490

Postby TUK020 » November 11th, 2020, 11:43 am

Charlottesquare wrote:
johnhemming wrote:
Moosehoosenew wrote:involvement of possible trustees,

My understanding of a PIC is merely a limited company that holds investments. I am not sure where trustees come in.


They don't.

The other point not raised on this thread is the ability to set up with the kids as the main shareholders, parents lend the company the money to say buy shares/investments, company uses dividends received from say shares/investments to gradually repay the loans from parents over time (so no tax on extraction) and the only asset in parents' estates on their death are the balances of the loans they made. If you do not fancy kids having voting control some nifty work with share classes might be useful (Freezer/Growth shares). This in effect allows parents to pass all future investment growth to the children whilst ensuring they have a sum of money they can draw upon, if say the investments yield 4% and all dividends received used to repay loans then parents have a tax free cashflow for up to 25 years.

Edit- Investment Trusts rather than shares (Avoid Unit trusts etc as can have nasty corporation tax implications re profit recognition within a company) can greatly reduce the incidence of corporate actions inadvertently triggering CT bills when not wanted and can often be purchased on a buy and forget basis.

Intriguing. Won't the company have to pay corporation tax on the dividend income?

Charlottesquare
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Re: Personal investment companies

#355502

Postby Charlottesquare » November 11th, 2020, 12:15 pm

TUK020 wrote:
Charlottesquare wrote:
johnhemming wrote:My understanding of a PIC is merely a limited company that holds investments. I am not sure where trustees come in.


They don't.

The other point not raised on this thread is the ability to set up with the kids as the main shareholders, parents lend the company the money to say buy shares/investments, company uses dividends received from say shares/investments to gradually repay the loans from parents over time (so no tax on extraction) and the only asset in parents' estates on their death are the balances of the loans they made. If you do not fancy kids having voting control some nifty work with share classes might be useful (Freezer/Growth shares). This in effect allows parents to pass all future investment growth to the children whilst ensuring they have a sum of money they can draw upon, if say the investments yield 4% and all dividends received used to repay loans then parents have a tax free cashflow for up to 25 years.

Edit- Investment Trusts rather than shares (Avoid Unit trusts etc as can have nasty corporation tax implications re profit recognition within a company) can greatly reduce the incidence of corporate actions inadvertently triggering CT bills when not wanted and can often be purchased on a buy and forget basis.

Intriguing. Won't the company have to pay corporation tax on the dividend income?


Not if it buys what used to be called Franked Investment Income- effectively a UK company receiving dividends from a UK company pays no tax on these dividends. (Care may be needed with overseas shareholdings but a little care buying UK ITs that invest overseas can wash out overseas investment issues)

I used to have a client whose company owned a few million pounds of UK shares and there was no impact on the CT bill from its trading activities regarding these dividends (Though used to hit small company relief when that was relevant and the investments likely limit BPR if done via a trading company and also likely disqualify its shares from Business Assset Disposal Relief (as ER now is))

But you do need to take care, FRS102 section 11 re Financial Instruments and the recognition of gains/losses re same can cause issues tripping tax on unrealised gains and losses if what you buy is not equity, a careful read of sections 11 and 12 are very advisable and professional advice about the sorts of instruments that will restrict tax liability just to occasions when you do decide to sell is a very good idea.

https://www.frc.org.uk/getattachment/69 ... March-2018).pdf

Edit- Be aware that REITs do tend to trip a tax bill re their distributions when received by a limited company.

Spet0789
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Re: Personal investment companies

#355508

Postby Spet0789 » November 11th, 2020, 12:34 pm

Charlottesquare wrote:
johnhemming wrote:
Moosehoosenew wrote:involvement of possible trustees,

My understanding of a PIC is merely a limited company that holds investments. I am not sure where trustees come in.


They don't.

The other point not raised on this thread is the ability to set up with the kids as the main shareholders, parents lend the company the money to say buy shares/investments, company uses dividends received from say shares/investments to gradually repay the loans from parents over time (so no tax on extraction) and the only asset in parents' estates on their death are the balances of the loans they made. If you do not fancy kids having voting control some nifty work with share classes might be useful (Freezer/Growth shares). This in effect allows parents to pass all future investment growth to the children whilst ensuring they have a sum of money they can draw upon, if say the investments yield 4% and all dividends received used to repay loans then parents have a tax free cashflow for up to 25 years.

Edit- Investment Trusts rather than shares (Avoid Unit trusts etc as can have nasty corporation tax implications re profit recognition within a company) can greatly reduce the incidence of corporate actions inadvertently triggering CT bills when not wanted and can often be purchased on a buy and forget basis.


This is more or less the use case I have in mind. Of course I will seek legal / tax advice on all this, but I think it works.

Establish PIC with nominal equity and two share classes (basically Class A for Spet + Mrs Spet, Class B for Mini-Spets)
Lend £500k to the PIC as an interest-free Director's loan.
Buy £650k of dividend-paying UK investment trusts (with some margin leverage).
Use net income (roughly 5% assuming 4.25% yield and 1.5% cost of margin) to repay the Director's loan over time (effectively tax-free income).
If I wish to, the class A shares can vote a dividend to the class B's to use up mini-Spet annual allowances while at university.
After roughly 20 years, loans are repaid and the PIC has 500k of equity before any capital growth.
No income tax has been paid.

Charlottesquare
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Re: Personal investment companies

#355515

Postby Charlottesquare » November 11th, 2020, 12:49 pm

Spet0789 wrote:
Charlottesquare wrote:
johnhemming wrote:My understanding of a PIC is merely a limited company that holds investments. I am not sure where trustees come in.


They don't.

The other point not raised on this thread is the ability to set up with the kids as the main shareholders, parents lend the company the money to say buy shares/investments, company uses dividends received from say shares/investments to gradually repay the loans from parents over time (so no tax on extraction) and the only asset in parents' estates on their death are the balances of the loans they made. If you do not fancy kids having voting control some nifty work with share classes might be useful (Freezer/Growth shares). This in effect allows parents to pass all future investment growth to the children whilst ensuring they have a sum of money they can draw upon, if say the investments yield 4% and all dividends received used to repay loans then parents have a tax free cashflow for up to 25 years.

Edit- Investment Trusts rather than shares (Avoid Unit trusts etc as can have nasty corporation tax implications re profit recognition within a company) can greatly reduce the incidence of corporate actions inadvertently triggering CT bills when not wanted and can often be purchased on a buy and forget basis.


This is more or less the use case I have in mind. Of course I will seek legal / tax advice on all this, but I think it works.

Establish PIC with nominal equity and two share classes (basically Class A for Spet + Mrs Spet, Class B for Mini-Spets)
Lend £500k to the PIC as an interest-free Director's loan.
Buy £650k of dividend-paying UK investment trusts (with some margin leverage).
Use net income (roughly 5% assuming 4.25% yield and 1.5% cost of margin) to repay the Director's loan over time (effectively tax-free income).
If I wish to, the class A shares can vote a dividend to the class B's to use up mini-Spet annual allowances while at university.
After roughly 20 years, loans are repaid and the PIC has 500k of equity before any capital growth.
No income tax has been paid.


The risks are forced corporate events forcing disposals that trigger tax, kids make poor marriages and say divorce settlements cause issues and governments changing legislation that either brings the dividends into charge or brings into tax valuation adjustments made within the company under changes to fair value accounting within the accounting standards. The one downside is such planning is intended to run for a long time, the longer one plans ahead the greater the risks.

The reason I prefer it over say trusts is unless one has a tame lawyer (I have my late father's ex junior partner but he is getting long in the tooth) the legal profession tend to often charge fees disproportionate to the value of assets in a trust (We have a family IIP Trust running which luckily is currently not that expensive re legal fees but likely will become so once my late father's colleague hangs up his quill) In addition I am far more comfortable with companies as I have spent the last thirty six years preparing their accounts/tax returns etc whereas I only have a limited understanding of trusts.

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Re: Personal investment companies

#355526

Postby scrumpyjack » November 11th, 2020, 1:24 pm

A lot simpler just to put the money in bare trust for the mini spets. They get personal and CGT allowances so no tax payable.

I can't help feeling the whole PIC thing will incur lots of costs and risks, and probably isn't worth it unless the amounts are ten times bigger than you suggest, and possibly not even worth it then.

There is the risk that mini spets do silly things with the money when they get to 18, but IMO that risk is smaller than the PIC risks long term.

hiriskpaul
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Re: Personal investment companies

#355549

Postby hiriskpaul » November 11th, 2020, 2:33 pm

Spet0789 wrote:
Charlottesquare wrote:
johnhemming wrote:My understanding of a PIC is merely a limited company that holds investments. I am not sure where trustees come in.


They don't.

The other point not raised on this thread is the ability to set up with the kids as the main shareholders, parents lend the company the money to say buy shares/investments, company uses dividends received from say shares/investments to gradually repay the loans from parents over time (so no tax on extraction) and the only asset in parents' estates on their death are the balances of the loans they made. If you do not fancy kids having voting control some nifty work with share classes might be useful (Freezer/Growth shares). This in effect allows parents to pass all future investment growth to the children whilst ensuring they have a sum of money they can draw upon, if say the investments yield 4% and all dividends received used to repay loans then parents have a tax free cashflow for up to 25 years.

Edit- Investment Trusts rather than shares (Avoid Unit trusts etc as can have nasty corporation tax implications re profit recognition within a company) can greatly reduce the incidence of corporate actions inadvertently triggering CT bills when not wanted and can often be purchased on a buy and forget basis.


This is more or less the use case I have in mind. Of course I will seek legal / tax advice on all this, but I think it works.

Establish PIC with nominal equity and two share classes (basically Class A for Spet + Mrs Spet, Class B for Mini-Spets)
Lend £500k to the PIC as an interest-free Director's loan.
Buy £650k of dividend-paying UK investment trusts (with some margin leverage).
Use net income (roughly 5% assuming 4.25% yield and 1.5% cost of margin) to repay the Director's loan over time (effectively tax-free income).
If I wish to, the class A shares can vote a dividend to the class B's to use up mini-Spet annual allowances while at university.
After roughly 20 years, loans are repaid and the PIC has 500k of equity before any capital growth.
No income tax has been paid.

My personal consultancy company has morphed into a PIC and it sort of works as I do all the admin myself now, but I don't think it would be worthwhile to set one up from scratch with 500k even if you do all the admin. Instead you could lend money to Mini-spets which they can gradually work into ISAs. They will get full CGT allowances and provided the dividends do not push them into higher rate tax, will only pay 7.5% income tax on dividends above £2k anyway. If they are still under 16 you can use Junior ISAs and between 16 and 18 I believe you can use both Junior and full ISAs (unless that loophole was closed recently). You do need to be careful with the income for under 18s though as anything over £100 per year would be added to your tax return, not theirs.

It would take a few years to work the money into Mini-spet ISAs, but eventually all investment returns will be free of income and capital gains tax. With a PIC you will end up with a vehicle still subject to tax. Corporation tax on any crystallised gains, with no tax free allowance, and potentially tax on getting money out of the PIC.

The disadvantage to lending directly to children (or other relatives/friends) is you have no real control over what they will do with the money, but you can make the loans repayable on demand and use Dickensian style threats to alter your will if they don't play ball and leave the money in the ISAs until you say otherwise (I find that threat works well!).

You may find you want to lend money to your children for other things other than investments as well, which is more awkward if it is tied up in a PIC. For example, one of my children has bought a property with money I lent her, although she had a reasonable deposit as well. She now has a tax free income under the rent a room scheme. She could not have obtained a sufficient mortgage to buy the property as she is only a student (albeit quite a well paid student).

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Re: Personal investment companies

#355553

Postby hiriskpaul » November 11th, 2020, 2:38 pm

scrumpyjack wrote:A lot simpler just to put the money in bare trust for the mini spets. They get personal and CGT allowances so no tax payable.

I can't help feeling the whole PIC thing will incur lots of costs and risks, and probably isn't worth it unless the amounts are ten times bigger than you suggest, and possibly not even worth it then.

There is the risk that mini spets do silly things with the money when they get to 18, but IMO that risk is smaller than the PIC risks long term.

Bare trusts do not get round the £100 income issue if the money in the bare trust came from parents.

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Re: Personal investment companies

#355561

Postby scrumpyjack » November 11th, 2020, 2:52 pm

hiriskpaul wrote:
scrumpyjack wrote:A lot simpler just to put the money in bare trust for the mini spets. They get personal and CGT allowances so no tax payable.

I can't help feeling the whole PIC thing will incur lots of costs and risks, and probably isn't worth it unless the amounts are ten times bigger than you suggest, and possibly not even worth it then.

There is the risk that mini spets do silly things with the money when they get to 18, but IMO that risk is smaller than the PIC risks long term.

Bare trusts do not get round the £100 income issue if the money in the bare trust came from parents.


Yes, sorry brain not engaged! They do if it comes from the grandparents which is what we have done.

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Re: Personal investment companies

#355617

Postby Spet0789 » November 11th, 2020, 5:28 pm

hiriskpaul wrote:
Spet0789 wrote:
Charlottesquare wrote:
They don't.

The other point not raised on this thread is the ability to set up with the kids as the main shareholders, parents lend the company the money to say buy shares/investments, company uses dividends received from say shares/investments to gradually repay the loans from parents over time (so no tax on extraction) and the only asset in parents' estates on their death are the balances of the loans they made. If you do not fancy kids having voting control some nifty work with share classes might be useful (Freezer/Growth shares). This in effect allows parents to pass all future investment growth to the children whilst ensuring they have a sum of money they can draw upon, if say the investments yield 4% and all dividends received used to repay loans then parents have a tax free cashflow for up to 25 years.

Edit- Investment Trusts rather than shares (Avoid Unit trusts etc as can have nasty corporation tax implications re profit recognition within a company) can greatly reduce the incidence of corporate actions inadvertently triggering CT bills when not wanted and can often be purchased on a buy and forget basis.


This is more or less the use case I have in mind. Of course I will seek legal / tax advice on all this, but I think it works.

Establish PIC with nominal equity and two share classes (basically Class A for Spet + Mrs Spet, Class B for Mini-Spets)
Lend £500k to the PIC as an interest-free Director's loan.
Buy £650k of dividend-paying UK investment trusts (with some margin leverage).
Use net income (roughly 5% assuming 4.25% yield and 1.5% cost of margin) to repay the Director's loan over time (effectively tax-free income).
If I wish to, the class A shares can vote a dividend to the class B's to use up mini-Spet annual allowances while at university.
After roughly 20 years, loans are repaid and the PIC has 500k of equity before any capital growth.
No income tax has been paid.

My personal consultancy company has morphed into a PIC and it sort of works as I do all the admin myself now, but I don't think it would be worthwhile to set one up from scratch with 500k even if you do all the admin. Instead you could lend money to Mini-spets which they can gradually work into ISAs. They will get full CGT allowances and provided the dividends do not push them into higher rate tax, will only pay 7.5% income tax on dividends above £2k anyway. If they are still under 16 you can use Junior ISAs and between 16 and 18 I believe you can use both Junior and full ISAs (unless that loophole was closed recently). You do need to be careful with the income for under 18s though as anything over £100 per year would be added to your tax return, not theirs.

It would take a few years to work the money into Mini-spet ISAs, but eventually all investment returns will be free of income and capital gains tax. With a PIC you will end up with a vehicle still subject to tax. Corporation tax on any crystallised gains, with no tax free allowance, and potentially tax on getting money out of the PIC.

The disadvantage to lending directly to children (or other relatives/friends) is you have no real control over what they will do with the money, but you can make the loans repayable on demand and use Dickensian style threats to alter your will if they don't play ball and leave the money in the ISAs until you say otherwise (I find that threat works well!).

You may find you want to lend money to your children for other things other than investments as well, which is more awkward if it is tied up in a PIC. For example, one of my children has bought a property with money I lent her, although she had a reasonable deposit as well. She now has a tax free income under the rent a room scheme. She could not have obtained a sufficient mortgage to buy the property as she is only a student (albeit quite a well paid student).


Assume I already max out ISA contributions for everyone in my family.

For me, the tax saving comes in the first 5 years. I will be an additional rate taxpayer for that period. The advantage (as I see it) of the PIC is that I will not incur any taxes on UK dividends in that period but can shift that taxable income later in life (as dividends on the PIC shares) either to my wife and I (when I am no longer an additional rate taxpayer) or to my children.

So as I see it, I can probably save around £10k per year.

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Re: Personal investment companies

#355690

Postby hiriskpaul » November 11th, 2020, 10:10 pm

Spet0789 wrote:
hiriskpaul wrote:
Spet0789 wrote:
This is more or less the use case I have in mind. Of course I will seek legal / tax advice on all this, but I think it works.

Establish PIC with nominal equity and two share classes (basically Class A for Spet + Mrs Spet, Class B for Mini-Spets)
Lend £500k to the PIC as an interest-free Director's loan.
Buy £650k of dividend-paying UK investment trusts (with some margin leverage).
Use net income (roughly 5% assuming 4.25% yield and 1.5% cost of margin) to repay the Director's loan over time (effectively tax-free income).
If I wish to, the class A shares can vote a dividend to the class B's to use up mini-Spet annual allowances while at university.
After roughly 20 years, loans are repaid and the PIC has 500k of equity before any capital growth.
No income tax has been paid.

My personal consultancy company has morphed into a PIC and it sort of works as I do all the admin myself now, but I don't think it would be worthwhile to set one up from scratch with 500k even if you do all the admin. Instead you could lend money to Mini-spets which they can gradually work into ISAs. They will get full CGT allowances and provided the dividends do not push them into higher rate tax, will only pay 7.5% income tax on dividends above £2k anyway. If they are still under 16 you can use Junior ISAs and between 16 and 18 I believe you can use both Junior and full ISAs (unless that loophole was closed recently). You do need to be careful with the income for under 18s though as anything over £100 per year would be added to your tax return, not theirs.

It would take a few years to work the money into Mini-spet ISAs, but eventually all investment returns will be free of income and capital gains tax. With a PIC you will end up with a vehicle still subject to tax. Corporation tax on any crystallised gains, with no tax free allowance, and potentially tax on getting money out of the PIC.

The disadvantage to lending directly to children (or other relatives/friends) is you have no real control over what they will do with the money, but you can make the loans repayable on demand and use Dickensian style threats to alter your will if they don't play ball and leave the money in the ISAs until you say otherwise (I find that threat works well!).

You may find you want to lend money to your children for other things other than investments as well, which is more awkward if it is tied up in a PIC. For example, one of my children has bought a property with money I lent her, although she had a reasonable deposit as well. She now has a tax free income under the rent a room scheme. She could not have obtained a sufficient mortgage to buy the property as she is only a student (albeit quite a well paid student).


Assume I already max out ISA contributions for everyone in my family.

For me, the tax saving comes in the first 5 years. I will be an additional rate taxpayer for that period. The advantage (as I see it) of the PIC is that I will not incur any taxes on UK dividends in that period but can shift that taxable income later in life (as dividends on the PIC shares) either to my wife and I (when I am no longer an additional rate taxpayer) or to my children.

So as I see it, I can probably save around £10k per year.

Not sure how you got to 10k per year on 500k investment unless you are pushing the boat out on yield - not a good plan for additional rate taxpayers. A global tracker ETF yields no more than 2%, so total dividend on 500k is less than 10k, additional rate tax on that about £3800. You can cut that down by investing in lower yield investments outside tax shelters. For example, Irish domiciled S&P 500 ETFs yield about 1.4%, but you can get the yield down lower than that. There are around 80-100 S&P 500 companies with stated policies not to pay dividends. They often use buy backs to return profits to shareholders instead.

Another option is to exploit the CGT "Bed and Breakfast" rules to roll up income on accumulating ETFs. UK reporting ETFs have something called "Excess reportable income". This is income that is reported to HMRC as accruing inside an offshore fund (including ETFs) but not paid out. Even though the income has not been paid out, it is subject to UK income tax. On income paying ETFs, excess reportable income is usually negligible, but on accumulating ETFs the excess reportable income is the entire amount of dividends received by the ETF (less costs). This income is deemed to have been paid at the end of each "Accounting Period", which is a fixed annual date. If you don't hold the ETF on that date, you are not considered to have received any income. This is where the "Bed and Breakfast" rules turn out to be very helpful. If you sell the ETF the day before the end of the period and buy it back the day after the period, you will not receive any excess reportable income. But you will make a capital gain or loss on the difference between what you paid to buy back the ETF and what you sold it for. To offset that gain, you can buy and subsequently sell another similar ETF that does not have a period end date or pay a dividend while you hold it.

For example, CSP1 is an iShares S&P 500 ETF that accrues income and has reporting end date at the end of July each year. IUSA is a similar iShares ETF that pays income quarterly (end March, June, September, December) with reporting end date at the end of February. To roll up income free of tax, invest in CSP1. Then just before the end of July (CSP1 period end date), sell it and buy IUSA. Then just after the end of July, sell IUSA and buy back CSP1. The capital gain/loss on the sell/buy of CSP1 should be very close to the loss/gain on nuy/sell of IUSA. On a 500k investment you should be well within the annual exemption limit. You will not be liable for income tax on CSP1 as you did not hold it at the end of July. A dividend will not be paid on IUSA for the brief period it is held either. There is some buy/sell friction to be paid, but provided you pick huge and liquid ETFs this should not be a significant problem. For example the spread on CSP1 and IUSA is only a couple of bps, so on a £500k trade, about £100 for each buy/sell. You will have to add in broker fees as well and may need more than 1 trade to shift a 500k position, but all in this is much better than paying a few thousand of additional rate tax.

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Re: Personal investment companies

#356760

Postby flyer61 » November 15th, 2020, 1:27 pm

A bit late to this thread. In 2002 on the advice of my accountant I set up a Limited Company which would specialise in investment properties. For IHT purposes the staring point was my children would each have an 8% stake in the business. The business has grown over that time and we are about to start gifting some of our shares to them as I can see the mother of all IHT bills when the Mrs and I are gone. An advantage of the Limited Company route is that my Wife has been a wage earner through it and this has allowed me to build a decent pension pot for her.

Subsequently my brother and I started a property joint venture in 2017 and again have used a Limited Company as the vehicle. My Company owns half the shares and his family trust the other half. Between us we have 7 children and this Company is with a view to any grandchildren we may have. So the property investing here is esoteric with an uber long term horizon.

It is probably time I took some professional advice about structure/ownership etc.


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