How do family business trusts work?
By way of example, the share capital of a family business is split into, say, A and B shares.
The rights of the attached to each class of share might be generally the same. However, it is usually the case that the B shares only participate in the future growth of the company and not in the capital value accrued to the current date.
The B shares still retain voting rights and dividends.
The B shares (or a proportion of) are gifted to the grandparents irrevocably.
This is an unfettered gift. It will be an event for Capital Gains Tax (CGT) purposes. However, it should be the case that the value of these shares is reduced by the rights attributed above.
It is also a transfer of value for Inheritance Tax (IHT) purposes although, again, the value will be negligible so an IHT charge should not be an issue.
Subsequently, further down the line, the grandparents might then, independently, decide to gift the shares thereafter to a new family trust for their grandchildren.
Again, this would be an event for CGT purposes and IHT purposes, and it is expected that the value of such shares should be negligible and therefore no immediate tax consequences should result.
The directors of the company, in the course of deciding whether to pay a dividend to all shareholders, might vote a dividend on the B shares.
The terms of the trust should allow the children to utilise their personal allowances and lower tax rates as opposed to the higher rates suffered by the parents.
There would be nothing to prevent the trustees can use the funds to satisfy school fees and other costs. As such, the parents having to take a dividend from the company for the same purpose out of income taxed at a higher rate.
Going forward, the shares in the trust should be qualify for Business Property Relief, protecting the value from the ten-year charge and any exit charge on a capital distribution.