I’m set to inherit £10m – can I set up an investment trust to manage it for my family and reduce tax?

I have been left an inheritance of £10 million, can I set up an investment trust to manage it?

I would like to manage my family’s estate and allow family members to have a stake in it.

Assets will include negotiated collateralized debt obligations, as well as property, bonds and stocks. SAL by email

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This is Money’s Harvey Dorset responds: Quite a question to have landed in This is Money’s inbox (and we promise readers it really has). A sum of £10m is a considerable inheritance and, unsurprisingly, you are concerned about how best to manage this pot.

What makes things complicated is that you are wisely willing to give the rest of your family a stake in this, manage it in a tax-efficient manner, and part of that is obviously minimizing future inheritance tax.

What this means is that you need a way to pass this wealth on to your family without having to pay inheritance taxes in the process.

You suggest setting up a mutual fund, but the costs of setting one up and listing it on the stock exchange mean that you won’t make much profit. Instead, a family investment company might be more like what you’re thinking.

This is Money spoke to two experts to find out how to best manage his £10m estate.

Closed company: Annabel Brodie-Smith says investment trust would not meet tax law requirements

Annabel Brodie-Smith, Communications Director at the Investment Trusts Association, replies: Investment trusts provide access to a diversified portfolio of professionally managed investments designed to generate long-term investment returns.

On the face of it, this may suit your needs as investment trusts can invest in a wide range of assets including stocks, bonds and harder to sell assets such as property, infrastructure and unlisted companies.

Investment trusts can be tax efficient: no tax is paid on capital within the fund and the general principle is that the total tax paid by the company and the investor on any income or investment should not exceed the amount of tax the investor would have paid if they held the investment directly.

They also allow one family member to sell their shares, while the rest of the family can continue to invest in the trust.

There are several well-known families that invest through investment trusts.

Six investment trusts have notable families as investors and some of these families have been involved in the launch of the trust or are still involved as directors: Caledonia, Hansa Investment Company, Majedie Investments, RIT Capital Partners, Brunner and Witan.

However, investment trusts must also meet certain tax legislation requirements, one of which is that the company must not be a “closely held company.”

In general terms, this means that the company must have broad participation.

Even if a company has a reasonably broad shareholder base, where those shareholders are connected to each other in some way, there is a risk that the company will become close because of their relationship.

This is something that HMRC focuses heavily on and specifically looks at things like family holdings to ensure that businesses are not closed down.

This test alone would indicate that an investment trust is not the right vehicle for you.

There is also a separate requirement for listed companies to have at least 10 per cent of their shares “in public hands” – that is, distributed to the public. This is likely to be a less onerous test than the one previously applied by HMRC.

There are also other factors that indicate that an investment trust is not the right vehicle for you.

As an investment trust is a publicly traded company, the preparation of a public prospectus required to launch an investment trust initially involves payment of significant fees; these fees are likely to exceed £100,000.

This would mean taking away a significant part of his inheritance.

Shares of an investment trust are traded on a stock exchange and would therefore be subject to the market forces of supply and demand.

As such, the buy/sell price is likely to be different from the company’s net asset value (NAV) on a given date and the share price may trade at a premium or discount to NAV.

While £10m is a huge sum to inherit, it’s not actually a lot to set up and manage a unit trust, meaning you wouldn’t get much of its benefits.

Considerations: David Goodfellow cautions that family members will be in different financial circumstances

David Goodfellow, director of wealth planning at Canaccord Genuity Wealth Management, responds: You are in a good position and with careful planning, you can ensure the safety of yourself and your family.

But often, when a person receives a lot of money, headaches also come.

Family complications, differing opinions on what to do with assets, and the differing financial positions of each family member all contribute to muddying the waters.

There are several options available to you, which complement each other, one of which could be to use a Family Investment Company (FIC) structure.

Family investment companies

It is essential that the reader obtains appropriate legal advice before establishing a FIC. A FIC is a way to manage the assets of the family estate with the flexibility to involve a wider group, including family members from multiple generations.

It can be useful to protect assets in the event of unforeseen family situations such as divorce.

But the main reason many set them up is to mitigate inheritance tax (IHT) payments. It’s not the only tool to achieve this, but collective investment trusts are an increasingly popular alternative to trusts.

Simply put, FICs are private limited liability companies created by a founder with the aim of managing wealth and defining succession.

They allow the directors of the FIC control over the assets and investments of the company.

Gifts can be made to younger relatives or trusts for IHT planning purposes.

A FIC may have different classes of shares, usually with different voting rights and access to dividends.

Financial Planning Considerations

A FIC is a complex vehicle, mainly because in many cases family members are at very different stages of life.

There may be younger members who do not have much personal wealth, families with children in private schools or colleges, or older, wealthier couples who have retired.

The point is that each individual’s different circumstances must be taken into account when defining the objectives and strategy of the family investment office.

Will it be predominantly to provide income to family members who need it? Or is it intended to grow the wealth of the FIC?

A cash flow planning analysis should be performed to assess the initial share capital of the FIC and how to structure the share classes and determine how the assets are structured and what should happen to them.

What can a family investment company host?

A FIC may hold assets such as property (but not the residential property of the founder or directors) and investment portfolios.

At Canaccord we manage the investment portfolios of several international financial institutions. Our starting point is always to establish an attitude towards risk.

Risk assessments need to be carried out for different classes of shareholders. A 20-year-old student will have a very different risk profile to a 70-year-old person.

It is necessary to reach an agreed risk profile for the FIC and establish the objectives of the FIC to build the investment portfolio.

For example, they might have a certain percentage attributed to growth and a certain amount attributed to revenue.

They might decide that ESG considerations are important and invest thematically.

They could invest through a selection of funds, or invest directly in stocks, bonds and alternatives, or a combination.

The time period for which they wish to invest is also a factor to consider.

He also mentions traded collateralized debt obligations, a niche investment that often carries a high level of risk and is not for the faint-hearted or, more generally, the retail investor.

This would be part of our discussion on risk and investment strategy.

All assets need to be assessed against the new goals and objectives of the FIC and a consensus needs to be reached on how to construct the portfolio.

Basically, it takes a lot of conversations and a lot of advice before you make a decision on whether a FIC is the right choice.

If so, a lot of preliminary work needs to be done from a legal, planning and investment perspective to ensure that it is structured correctly and that the objectives of the FIC are appropriate for all family members included in it.