Using a company to hold your rental portfolio
Why would you use a family investment company instead of a normal limited company for your rental portfolio?
Your accountant has probably advised you that due to Section 24 of the Income Tax Act, especially if you have mortgages, you should consider putting your properties into a limited company. If you were to do that, you would, firstly, set up a partnership, and then incorporate that partnership into a limited company. That advice does not go far enough as it only considers income tax and capital gains tax but not longer term inheritance tax.
We believe that family investment companies offer significantly better value than a normal limited company.
Benefits of using a family investment company for rental properties
Using a family investment company allows you to hold your property portfolio in a company, but with a slightly different, more beneficial set up and governing rules:
1) Alphabet shares - You can have different distributions of income to different people, which is frowned upon in a normal limited company. In addition, you can have growth shares in your children's names, and not accumulate any growth within the shares held by you. In doing so, the growth of the property portfolio is outside of your estate;
2) Entrenched directorships - When you set up a family investment company, you can change the rules of corporate governance so that you are allowed to be a director for as long as you live (together with your wife, if you are married). The benefit is that you control the assets for as long as you live and you control the profits of the company. You can decide whether to give your children income or not. To avoid IHT you can still give the shares away to your children, and those shares constitute a potentially exempt transfer (PET) of capital gains tax (CGT) issues;
3) Direct lineage rules - You can stipulate that only your children and grandchildren are allowed to be shareholders. That means the spouses of your children can not to be shareholders. If any of your children get divorced, the value of those shares is significantly reduced because nobody else is allowed to hold them. Usually, your children will be minority shareholders, and not directors so they have no control over who is able to benefit off the shares.
The benefits are that you could have entrenched directorships and you can have alphabet shares, which are two things that will make a massive difference to the taxpaying side of your family Investment company.
There are a number of benefits around a family investment company, making it a better family wealth investment vehicle than a normal limited company.