I'm inheriting £10m - can I set up an investment trust to manage it for my family and cut tax?

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I am being left £10million as an inheritance, could I create an investment trust to manage it?

I would like to manage my family's wealth and enable members of the family to have a stake in it.

The assets will involve traded collateralised debt obligations, plus property, bonds and shares. S.A.L via email

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Legacy: Creating a family investment company might allow the reader to mitigate inheritance tax for their family

Harvey Dorset, of This is Money, replies: What a question to land in the This is Money inbox - and we promise readers this genuinely did. A £10million sum is a considerable inheritance to be on the receiving end of, and unsurprisingly you are concerned about the best way to manage this fund.

Complicating matters is that you are, wisely, keen to give the rest of your family a stake in this, manage it tax efficiently, and one part of that is obviously minimising future inheritance tax.

What this means is that you need a way to pass this wealth onto your family without being stung by inheritance tax in the process.

You suggest setting up an investment trust, however, the costs involved in creating this and floating on a stock exchange mean that you are unlikely to get much benefit from doing so. Instead, a family investment company may prove to be more like what you are thinking of. 

This is Money spoke to two experts to find out what the most effective way is for you to manage your £10million inheritance.

Close company: Annabel Brodie-Smith says an investment trust would not meet tax legislative requirements

Annabel Brodie-Smith, communications director at the Association of Investment Companies, replies: Investment trusts provide access to a professionally managed diversified portfolio of investments designed to generate a long-term investment return. 

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

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

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

There are a number of well-known families who invest through investment trusts. 

Six investment trusts have a notable family as investors and some of these families have been involved in launching 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 some tax legislative requirements, one of which is that the company must not be a 'close company'.

Broadly speaking, this means the company must be widely held. 

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

This is something that HMRC are very focused on, and they specifically look at things like family holdings to ensure that companies are not close. 

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 to be 'in public hands' i.e. distributed to the public. This is likely to be a less onerous test to that applied above by HMRC.

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

As an investment trust is a listed company, there are initially significant fees involved in preparing a public prospectus which is required to launch an investment trust, these are likely to be upwards of £100,000. 

This would take a significant slice of your inheritance.

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

As such, the sale/purchase price is likely to be different from the net asset value (NAV) of the company at any given date with the share price trading at a premium or discount to NAV.

While £10million is a huge amount to inherit, it is actually not much to set up and run an investment trust, meaning that you would not receive many of their advantages.

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

David Goodfellow, head of wealth planning at Canaccord Genuity Wealth Management, replies: You are in a nice position and with careful planning, you can secure your and your family's security. 

But often when a lot of cash comes a person's way, so do the headaches.

Complications with family, differing opinions on what should be done with the assets and varying financial positions of each family member all serve to muddy the waters. 

There are a number of options open to you, which complement each other, one of which could be using a Family Investment Company (FIC) structure.

Family investment companies

It is vital for the reader to get appropriate legal advice before setting up a FIC. An FIC is a route to managing assets for family wealth with the flexibility to involve a wider group, including multi-generational family members. 

It can be useful to protect assets against unforeseen family situations such as divorce.

But the main reason why many set them up, is to mitigate against inheritance tax (IHT). It is not the only tool to do this, but FICs are an increasingly popular alternative to trusts.

In a nutshell, FICs are private limited companies set up by a founder with the aim of managing wealth and defining succession. 

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

Gifts to younger family members or trusts can be made with a view to IHT planning.

An FIC can have different classes of shares usually with different voting rights and access to dividends.

Financial planning considerations

An FIC is a complex vehicle, primarily because in many cases family members are at very different life stages. 

You might have younger members who don't have much personal wealth, families with children at private school or university, or older, wealthier couples who have retired.

The point being that everyone's different circumstances need to be taken into consideration when defining the objectives and the strategy of the family investment office. 

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

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

What can a family investment company hold?

An FIC can 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 a number of FICs. Our starting point is always establishing attitude to risk.

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

A consensus risk profile for the FIC needs to be reached and the goals of the FIC established to build the investment portfolio.

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

They might decide ESG considerations are important and invest thematically. 

They could invest through a selection of funds, or invest directly into equities, bonds and alternatives – or a combination. 

The length of time they want to be invested is also a consideration.

You also mention traded collateralised debt obligations, a niche investment that often carries a high level of risk and are not for the 'faint hearted' nor generally for the retail investor. 

This would form part of our risk and investment strategy discussion. 

All assets need to be assessed against the FIC's new goals and objectives and a consensus reached in terms of how to construct the portfolio.

Fundamentally, many conversations need to happen and a lot of advice needs to be taken before a decision is reached on whether an FIC is the right option. 

If it is, a lot of legal, planning and investment groundwork needs to be done to ensure it is structured in the right way and the goals of the FIC are right for every family member included in it.