Authors: David Denton and Andrew Wilson from Quilter Cheviot
As we face the ‘Great Wealth Transfer’—the largest generational wealth shift in history—and deal with a more complex tax environment, long-term wealth planning is more important than ever.
A family fund can offer significant tax, continuity benefits and can form part of wider wealth strategies for certain clients. They can enable clients with substantial investments who seek to defer tax on capital profits. These funds are authorised and regulated by the FCA, providing a valuable tool for managing wealth efficiently as we approach the Great Wealth Transfer.
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Structure and regulation
Family funds are typically created under company legislation as an OEIC (Open-Ended Investment Company) for unitholders or by a trust as an Authorised Unit Trust for shareholders. Most frequently, they are established under Non-UCITS Retail Schemes (NURS) legislation, allowing them to avoid UCITS restrictions and enabling a more diverse investment universe.
In practice, individual clients and their families become shareholders when the OEIC is created, entitling them to receive dividends from the underlying holdings and capital when shares are redeemed. As these funds are open-ended, the capital can vary, and there is no fixed number of shares in issue.
A dedicated investment manager is appointed to advise on the assets within the fund, while the client can influence the investment policy through the ACD (Authorised Corporate Director), who is ultimately responsible for the fund from a legal and regulatory perspective. Quilter Cheviot offers a comprehensive, bespoke service tailored to include cherished holdings, existing investments, and the clients’ ethical considerations.
Taxation of family funds
Internal taxation (assuming less than 60% are in debt instruments):
- There is no tax on capital gains (CGT) from investments within the OEIC, allowing CGT to be deferred until a unit is sold by the ultimate owner.
- OEICs are subject to corporation tax on any taxable income they receive at 20%, though most dividends received by the fund are not taxable. Fees are deducted from income, reducing the taxable element.
- No value added tax (VAT) is chargeable on investment manager fees.
Taxation for the unitholder, when personally held without a wrapper:
- Dividend distributions are treated as UK company dividends, chargeable at 8.75% (for basic rate taxpayers), 33.7% (for higher rate taxpayers), or 39.35% (for additional rate taxpayers). No withholding tax is imposed in the UK on any dividend distributions paid by an OEIC.
- Disposal of units results in a capital gain, taxed at 18% for non or basic rate income taxpayers, and 24% for higher or additional rate income taxpayers, above any available allowances.
- There is an uplift in value upon the death of the unitholder, which can be significant given the roll-up of untaxed capital profits within the fund.
Cost efficiency and consistency
Although an ACD is required, costs can be low due to the absence of marketing or distribution needs, allowing family members to benefit from economies of scale. Pooling assets also provides consistency within the family strategy across multiple wrappers that hold the fund, potentially simplifying reporting.
Family funds in action – a case study
The client is a family with assets currently valued at approximately £10 million. The family relationship is primarily managed through the daughter, who guides everyone, although we regularly meet with each member. The assets are distributed across various accounts: 6 ISAs, 4 JISAs, 4 Trusts, 7 SIPPs, 2 FICs, and 3 Offshore Bonds. The family runs a successful business and has recently sold a subsidiary for approximately £8 million, with some of this amount to be added to the portfolio.
Consideration of a family OEIC
We considered establishing a Family OEIC for several reasons:
Costs: Although we primarily work with the daughter, the accounts are split across four family groups:
- Mother & Father.
- Brother and sister-in-law, including children.
- Sister and ex-husband, including children.
- Sister’s new partner.
Each group incurs separate fee levels, and while the total assets are substantial, the discounts across these subgroups on our fees are not very significant. Combining all assets within one OEIC would allow them to benefit from a fee reduction due to the portfolio size exceeding £3 million.
Consistency: Despite all clients having the same risk profile, certain restrictions on Offshore Bonds and account sizes result in different underlying structures and outcomes for each account. The OEIC option eliminates these discrepancies, ensuring that clients are aware that the ‘pot’ grows as one. Additionally, all accounts can now benefit from the full scale of our research, particularly in direct Fixed Interest and Equities (UK, US & Europe), leading to reduced underlying fund costs and additional savings for the client.
Personalisation: The only restrictions on the portfolio construction are those imposed on the fund at the outset, such as diversification rules and benchmarks chosen for the OEIC (typically an IA benchmark). This allows for greater tailoring of the portfolio to meet the client’s objectives, such as focusing on specific commercial properties. The family also has the opportunity to name the fund and see published pricing, making it ‘their’ investment. We can adapt the factsheet to be tailored to their preferences. Additionally, new members can be added to the pot, such as the daughter’s new partner.
Simplification: Future discussions with the clients, involving both the investment manager and financial adviser, will be more streamlined. The investment discussions will focus on the performance of one investment, and the financial adviser will have a standard investment recommendation for the clients. While AIM investments must sit outside the OEIC, the overall discussion will centre on their desired outcomes and how best to achieve them.
This is a specialist area of planning, where Quilter Cheviot has over 25 years’ experience in providing investment management for family funds both onshore and offshore. We can help guide you through the options and issues commonly faced when creating family OEICs or AUTs, and provide a dedicated investment manager to follow the mandate set by the ACD and financial planner to meet the defined needs of the client.
Disclaimer
This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction. Trusts, estate planning, taxation and inheritance tax advice are not regulated by the Financial Conduct Authority. Tax treatment depends on an individual’s circumstances and may change in the future.
