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THE BENEFITS OF USING A FAMILY INVESTMENT COMPANY IN YOUR WEALTH PLANNING

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When you’re planning out the future stability of your family’s wealth, it’s important to consider both the legal structures you use to do this, and the long-term aims of your planning. Trusts and family investment companies are both useful options to be aware of, but it’s important to understand their different purposes and how they impact on your strategy.

Nicola Goldsmith outlines the differences between a family investment company and a trust and how both can factor into a holistic estate planning and wealth management solution.

 

Understanding how you use FICs and trusts

To achieve the best outcomes from your estate planning and wealth management, it’s important to look at all possible legal structures and how they can be used to your family’s benefit.

Family investment companies and trusts are two kinds of structures that are commonly used in planning. But what are the key differences between them?

  1. A family investment company (FIC) is a normal company that’s incorporated and limited by shares. The difference is that it holds investments instead of trading. The FIC is used to manage and control the wealth, property and investments held by the family.
  2. A family trust is a legal entity (not a company) that’s set up so that family members can benefit from an asset (or assets) without being its legal owner. Trusts can be used in their own right but they can also be part of your FIC planning.

A FIC will continue as long as the company continues to exist. A trust only lasts for 125 years. So, a FIC is better for very long-term planning. If you create the right classes or shares, a FIC will give you great control over your estate and wealth, and over a longer, multi-generational timeframe.

Understanding these key differences in legal structure and purpose is important, and it’s key to knowing when a FIC is appropriate and when a trust would be a better option, or whether both should be used together.

 

Who sets up a FIC and how are the shares allocated?

FICS are usually set up by grandparents or parents. People subscribe for shares to get money into the company, or they will put assets into the company by way of gift. Making gifts is not as common, as there are potential lifetime taxes involved.

You can create several different classes of shares within the company, and each will have different rights. Whoever sets up the company will usually hold shares bearing the voting rights and will usually be the directors of the FIC.

  • Grandma and grandpa may set up the company and may sell a property, shares or cash to the company. They will have the A and B shares, usually. They will have rights to dividends and will have voting rights on who becomes directors, when the company is wound up and which classes of shares get dividend payouts made from the company and when. They will often have shares that bear dividend rights, and also rights to assets or value on winding up of the company. Sometimes the value of these shares is ‘frozen’, with the growth in the value of the company going into the other share classes.
  • Their children may subscribe to the B shares or the C, D or E shares etc. They might have the right to income, to dividends and capital on a winding up, but will not usually have the right to vote. Control stays with the original shareholders and the people who set it up – and, for many people, that’s an important element of using an FIC; to stay in control of that wealth.
  • F shares might go to grandchildren or to a trust for future planning. They may not have voting rights or rights to winding up, so their capabilities are limited, but they do benefit from the wealth that’s invested in the FIC. They are usually not able to sell the shares or to use them as security.

Many such companies are set up initially by parents, rather than grandparents, although the grandparents may acquire the F or another class of shares in the FIC and settle these into a trust for their grandchildren.

 

How can a FIC benefit the next generation?

First of all, any growth in the value of the FIC passes into each share class, so some of that growth immediately passes outside the estate. However, the shares can also be set up so that when the company reaches a certain amount of value, any growth above that hurdle can pass into the shares belonging to the children and/or grandchildren, not to the directors that set up the FIC. A FIC is an excellent way for grandparents or parents to pass on wealth to the next generation and take that growth outside their estates.

For example, £500,000 may go in, but the rise in the value above this will go to your children or grandchildren, not into your shares – the value of your shares will be effectively frozen. But you have control and none of the other shareholders do. Your kids can create other shares and trusts further along the line as and when needed, as the family evolves over time, providing flexibility over generations.

The design and details of a FIC will be bespoke to each case, especially the articles of the company and how things happen when there’s a divorce, death or someone goes bankrupt etc. Because of the way shares and rights are allocated, children can have wealth but can’t do anything with it. They don’t receive an income unless the directors vote dividends to them. They can’t cash it in and buy a Ferrari on their 18th! But it can also help protect pre-existing wealth when entering into a relationship, and that’s a primary reason for putting wealth into one of these structures – it adds a layer of security and control over this wealth.

 

Practical ways to make use of this wealth

A parent may set up a company with their children because it’s a sensible way to achieve growth for the next (and successive) generations. It’s like a trust, in that it protects assets, and that wealth can pass out of your estate, but you can continue to benefit from the income and gains generated, which is not the case with a trust without a tax charge!

If your child needs school fees and the FIC is able to pay dividends, then it may be possible for the FIC to pay for those school fees without tax charges arising. This would be the case where the children’s grandparents either gave them shares or set up a trust that held shares on the children’s behalf. This uses the child’s personal allowance, dividend allowance and possibly the basic rate band. An individual with no other income can receive £50,000 of income from a FIC or trust and pay as little as around £2,700 of tax on this income. This tax treatment wouldn’t apply if the parents gave the shares to the children, because the parents would be taxed on their minor children’s income (although it does work for university fees once the children reach the age of 18). In essence, using the FIC allows estate planning and managing an income for your children, all within the company structure.

If you had a million pounds in a FIC then you would expect that to double every 15 years or so. FICs are essentially a wealth-planning structure. In the past, there’s been the misapprehension that FICs were being used for unscrupulous means, but HMRC’s FIC unit was recently disbanded as it could find no evidence of FICs being used for tax avoidance.

 

Reasons for putting wealth into a FIC

We’ve seen that FICs are a secure and flexible way to manage your estate and wealth. But why would you choose to put your cash into a FIC rather than a standard savings vehicle?

Here are a few potential reasons:

  1. You might have a trading company with a lot of cash sitting in the company. A FIC is a good way to take that money out, loan it to a new company or restructure the group. You may be able to get it relatively tax and cost-efficiently into a FIC.
  2. You might have inherited a lot of money and want to look at securing this wealth for your children and their children. A FIC is an excellent way to put this cash into a productive legal structure and curate that wealth over successive generations.
  3. You might be looking at building a property portfolio and a corporate structure via a FIC may be better than personal ownership or a trust, especially with growth in the housing market at the moment and the rules restricting tax relief on interest payments.

 

Working closely with your family adviser

You’re dealing with substantial amounts of cash when considering a FIC – it’s not usually cost-efficient to do for anyone with under £1million ready to invest. As such, it’s sensible to work closely with an experienced adviser who can give you the best possible guidance on which path to take.

As advisers, we’ll look at your family’s position holistically. For some people, a trust may be better than a FIC. Having misgivings about your family’s ability to manage money is not uncommon, so this is a good way to manage things and look at estate planning. You can also put more money into a FIC than a trust, so that can also be a factor in your decision.

By setting up a FIC, you are creating a company. As such, you do need to produce accounts, file with Companies House and pay corporation tax returns along with all the usual compliance. It’s probably more expensive than a trust in terms of getting the accounts done. There are costs involved, but the structure does force you to have up-front and honest conversations about money – and that’s where a good adviser can be invaluable.

 

Helping you set up and manage a FIC

Come and talk to us if you’re looking to work on your estate planning and wealth management.

At Haines Watts London, we have extensive experience of different family circumstances and wealth requirements. Every family is unique, there’s no ‘one size fits all’ answer to estate and tax planning. We offer a genuine one-stop shop for all your family and business planning needs, including looking after your planning, investment strategy and the legal compliance of your FIC.

Creating a FIC is part of a holistic estate planning and wealth management solution, so the time to act is now – protecting the future path of your family’s wealth management.

 

Technology

A Smarter World: What role will electronics play in 2022

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There has been a sharp increase in technology and devices designed to make our lives simpler, faster and more productive in recent years.

Industry 4.0 is taking the digital revolution of the late 1900s one step further, combining cyber-physical systems with the power of the internet of things (IoT) to automate computerised decision-making and enhance efficiency. As a result, intelligent technology has surpassed the simple tools and gadgets people enjoy using every day; it has become a driving force for innovation and problem-solving for businesses worldwide.

The first generation of ‘smart’ technology products provided enhanced connectivity, allowing people to stream video on smart televisions or communicate wirelessly between devices. But with the development of artificial intelligence (AI) and machine learning (ML), our devices do more than simply talk to each other; they collect and interpret data to inform user experience and automate processes that would typically require human guidance.

From watches to phones, building controls to medical equipment, we are heading towards a ‘smarter’ world at lightning speed. So, in 2022 and beyond, technology will continue to evolve and improve its capabilities to deliver personalised, mechanised solutions that will optimise functions and enhance our day-to-day lives.

 

How will smart tech change our way of life?

The pandemic has significantly impacted global technology trends, with lockdowns contributing to heightened activity within the consumer electronics industry.

The demand for games consoles, smart televisions and other entertainment devices led to an 18% increase in the global consumer electronics market (excluding North America) in the first half of 2021, reflecting pandemic-related behavioural changes and consumers’ growing expectations for premium electronics. Following the outbreak of COVID-19, the public is also more conscious of their health and the limitations of our health services than ever before. Wearable technology such as smartwatches — which can remotely monitor and record physical health data — is, thus, becoming increasingly appealing.

As more and more businesses embrace remote working models, employees are enhancing their homes with innovative home technology, too. Demand for devices such as mobile stereo headsets and headphones spiked in the wake of lockdowns. Organisations are also embarking on digital transformation to secure online networks and optimise energy efficiency in modern offices.

The future of the electric vehicle market also looks bright. With governments facing global pressure to reduce carbon emissions, major automotive manufactures like Bentley, Volkswagen and Audi have pledged to cut fossil fuel cars from their product portfolios by 2030. And despite the pandemic-related semiconductor shortage that crippled the automotive industry, UK electric vehicle sales jumped 186% in 2020.

 

How will the electronics industry meet demands?

In a digital world, technology is embedded in everyday objects, and ubiquitous computing connects devices through continuous networks of sensors and servers — all of which must be carefully designed and produced by electronics manufacturers. As a result, the future of electrical engineering will depend on the industry’s ability to address the technical and logistical considerations for delivering these advanced systems and equipment.

From smart grids to intelligent lighting, IoT has the potential to revolutionise the way we live. With technology permeating so much of our lives already, local governments are investing in ‘smart cities’ that will harness data collected through the IoT and cloud-based technology to tackle social issues and improve urban life, sustainability and transport. However, the IoT will also be essential to developing new electronics.

Brexit, the pandemic and labour shortages have impacted supply chains and threatened to stunt the industry’s ability to keep up with ever-increasing demand. But embracing IoT can streamline processes, provide accurate real-time data to mitigate supply chain disruption and improve the overall quality of printed circuit boards (PCBs) and other core components within electronics. Plus, as sustainability is a core focus for businesses across sectors in 2022, developments in AI and ML will be crucial to ensuring systems are operating with the minimum energy output.

From remotely controlled wire cutters to industrial robotics performing monotonous tasks in factories, investing in robotics will also be crucial for electronics manufacturing services providers. While the industry focuses on training the next generation of engineers, adopting robotics will reduce the likelihood of human error that might affect manufacturers’ abilities to continue delivering high-quality electronics products at scale.

 

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Investing in workforce intelligence now, leads to an optimised tomorrow

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Michael Cupps (Senior VP, Marketing, ActiveOps) discusses four critical ways in which a new world of workforce data improves organisational function.  

As governments work rapidly to respond to the Omicron variant, businesses experienced its effects as a timely reminder that flexibility is an essential part of any attempt to open offices again.

Even in a hybrid work environment, the unpredictable nature of the world and people’s lives means that organisations will need workforce management methods and tools that are flexible and intelligent to make the transition a success.

As a result, it’s as important now as ever to look at how data is the key to getting direction during these changing times – and how some of the data requirements that might seem burdensome can be a source of optimisation.

 

Attitudes on workforce data are continuing to change with the times 

Michael Cupps

The pandemic has already forced a sea-level change in how operations managers understand their workforce and workload and plan their operations. While traditional workforce management data was based on looking around the office to get a sense of things and historical data around skills, schedules, inventory, and so forth, the pandemic left many operations managers in the dark as their teams worked remotely. Many organisations had already adapted to this change, implementing new methods of understanding productivity and performance and managing employees that were effective when working from home.

As hybrid working becomes the norm, the question remains for managers, where are my people most productive? Working from home is the preferred option for many employees, but not all of them – and not all types of work can be adapted to remote working.

More recently, other layers have started to appear that present a challenge to operations managers. One layer is eligibility – as in, who is allowed to work in an office or not.

Of course, US organisations will still be feeling the effects of the government’s attempt to enforce a nationwide vaccine mandate. Still, other countries are facing similar legislation – Western Europe is experiencing what can only be described as a ‘COVID-19 reality check’ when Austria became the first country to enforce a total lockdown since the vaccine rollout. The news of a rising number of cases has led to drastic actions from Schallenberg, with the announcement that Austria will enact compulsory vaccinations in early 2022, which has sparked violence in Vienna as tens of thousands of people protest the measures.

While vaccinations have been the key to the UK’s return to normality, nations that continue to struggle with controlling the virus will have an eye on Austria’s vaccine mandate and consequently fear that it will be a sign of what’s to come. With the ever-changing pandemic situation in Europe, businesses must prepare for the uncertainty.

If other Western European countries follow Austria’s example, vaccination mandates will inevitably add a new and novel challenge for businesses. Across every industry, management teams are already feeling overwhelmed. After two years of new variants, new vaccines, and new restrictions on the workforce, Austria’s mandate, as well as Biden’s Executive Orders in the USA, exemplify a new risk to the growing stability that vaccinations gave us.

Some organisations are implementing their own mandates regardless of national policy – the upshot being that, as a result, operations managers now need to know who is allowed to work in a particular location at any given moment. And of course, as the Omicron variant becomes more widespread and its effects are felt in society, organisations will need to rapidly adjust their plans to keep employees safe and comply with the law.

This can all feel very burdensome for operations managers: more data to gather, more lenses through which to look at workload, resources, and availability. But while there may be some initial pain associated with responding to these new requirements, I believe that they present an opportunity to create a more optimised future of work.

Understanding comprehensive workforce data can make business life more manageable. Thereby, it’s crucial to outline the four ways it contributes to a productive workplace.

 

1: It creates a well-balanced and engaged workforce

It’s no secret that your employees will have preferences for where they work. Understanding those preferences and factoring that into your planning can help ensure your employees are engaged in their work, improving productivity, well-being, and retention. If you can layer that information with data on employees’ performance in different environments, you have another part of the picture to help you balance your workforce. Of course, that data may need a third layer – who is eligible to work in which locations – and that needs to be handled correctly so that you comply with any local or national laws that are in force or will come into force.

 

2: It helps to reduce costs

This has already been discussed concerning the pandemic in a few places. As organisations move to hybrid working models, their need for office space reduces the costs associated with it. That could include rent, power, heating, water, insurance, and facilities.

But the cost argument goes beyond the maths of office space. Armed with the correct data, organisations can ensure that their people are working where they are most productive and happiest. That can reduce costs, mainly in decreased absenteeism, costing thousands of pounds per year.

That reduced cost could be used to help balance the books in a tight year – or it could mean that funds are available for training and coaching programmes that improve employee performance or even on rewarding high-performing employees.

 

3: It broadens the scope for your talent pool

Although gathering and analysing more data might feel burdensome, the truth is that it enables you to implement hybrid working models effectively and with confidence that they will deliver. And that means that you gain all the benefits of a hybrid work environment – including a vastly expanded talent pool. With minor roles a part of the norm, you can hire anyone from any country, allowing you to create more diverse and talented teams than you could before.

 

4: It can help make a positive contribution to sustainability efforts

Most organisations are considering reducing their carbon footprint and becoming more sustainable. If your organisation uses data to support a hybrid workforce, you should see a reduction in emissions on multiple fronts. You may see reduced emissions as fewer employees commute and those who commute less. You may see a reduced need for office lighting and heating – not to mention a reduction in office waste – as footfall in the office decreases.

The workforce data you gather to enable all this will help demonstrate a contribution to your organisation’s emission reduction programme – or could even form the basis of starting one if you haven’t already.

 

Availability is the new eligibility

It’s essential to start thinking about gathering data in a different light. Eligibility is arguably the most pressing (and stressing) requirement for organisations right now, and the temptation can be to find a solution that focuses solely on eligibility. But to take a broader view, eligibility data isn’t that different from the other data you’re gathering about employees and where they can work. You’re trying to build a picture of where your workforce is based – and eligibility is just one more layer on top of others, such as where your employees prefer to work and where they are most productive. When you consider the challenge in those terms, the uses for the data, you’re gathering suddenly expand. We’re calling the blanket term for this data “availability.”

Of course, gathering availability data – and indeed all the workforce intelligence that makes the four things I’ve mentioned possible – is the trick. In a hybrid world, that data needs to be gathered automatically, wherever employees are based, in real-time, to give managers as much detail as possible. But at the same time, organisations need to find solutions to prevent managers from drowning in data, which will prevent them from getting on with their jobs.

 

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