Who Owns the Asset?

Capital at Risk — Paper 17

I. Ownership

Clients quite reasonably talk about my pension, my company and my portfolio. Consolidated reporting encourages the same view by bringing assets held through different structures together under one name and value.

For planning purposes that can be convenient. It can also conceal what is actually owned.

Once capital sits inside a pension, trust, company, insurance policy or custody arrangement, ownership becomes less straightforward. Legal title may sit with one party while somebody else receives the economic benefit or gives the investment instructions. Tax can follow another route again.

Most of the time these distinctions cause no practical difficulty, which is why they are easily ignored. They become important when somebody wants to move the capital, borrow against it, give it away, change the investment or deal with what happens on death.

A shareholder who owns an entire company does not personally own the company's bank account or properties. A pension member can direct investments without owning the underlying pension assets. The holder of an investment bond owns a policy whose value is determined by investments belonging to an insurer.

All three can reasonably describe the capital as theirs. The description is economically accurate, but incomplete.

II. Ownership Through Other People

Custody provides a relatively uncomplicated example. Investments can be registered through nominees while the underlying investor retains the beneficial interest. Modern securities markets could hardly operate efficiently if every transaction required each underlying investor to appear individually on the register.

Trusts separate the relationships more deliberately. With a bare trust, the beneficiary has an absolute beneficial entitlement and, once of age and capacity, can generally require the trust property to be transferred to them. That sounds close to outright ownership, but the form in which the property is held can still matter.

We encountered this where an underlying asset was held jointly. A beneficiary could be absolutely entitled to their interest without possessing unilateral control over the asset as a whole. Dealing with the whole asset required the participation of the other owner.

The beneficial entitlement had not disappeared. The practical authority attached to it was narrower than the word ownership might suggest.

III. The Pension Member

A SIPP makes the language particularly awkward. The name itself emphasises self-investment and the member may exercise considerable influence over how the pension is invested, either directly or through advisers and investment managers. Paper 16 considered how the SIPP operator can nevertheless restrict the assets available.

The member does not simply own the investments inside the pension.

The inheritance-tax changes due to take effect from April 2027 provide an unusually clear illustration. Under those rules, most unused pension funds and pension death benefits are due to enter the inheritance-tax calculation, but the mechanism does not transfer ownership of the underlying pension assets to the member immediately before death.

Instead, the legislation uses notional pension property and treats the member as beneficially entitled to an amount calculated by reference to the pension immediately before death. HMRC's technical guidance explains that the underlying pension assets themselves are not treated as belonging to the member merely because their value is relevant to inheritance tax. Reliefs and provisions applying to particular property therefore do not follow the investments held inside the pension.

Several ideas that sound similar in ordinary conversation coexist. The member has pension rights, can benefit from the capital subject to the pension rules and may have considerable influence over investment. Another party holds the assets within the pension architecture, while tax legislation can attribute a value to the member for a particular purpose.

Calling it my SIPP remains perfectly sensible. It just does not answer many of the questions that matter.

IV. Owning a Policy

Investment bonds create a different separation. The policyholder owns contractual rights under an insurance policy; the insurer owns the investments used to determine the value of those rights. The investment universe, tax treatment and degree of permissible influence over investment selection depend partly on the policy architecture rather than simply on what the underlying investments are.

The familiar rule of thumb of using onshore bonds for income and offshore bonds for growth is too crude. The comparison depends on the client's tax position while the investment is held and when benefits are eventually taken. Gross roll-up offshore can allow capital that might otherwise have been paid away in tax to remain invested and compound. An onshore bond can still produce the lower overall tax liability. The structure changes the timing and incidence of tax as well as the investment opportunity set.

Offshore bonds can accommodate broad investment management, but that flexibility has boundaries. The personal portfolio bond rules make the degree of influence over investment selection relevant, while portability between jurisdictions can depend on what has been admitted to the policy during its life.

Historically, these layers could become remarkable. Before modern platforms became ubiquitous, an insured personal pension could have a self-invested facility which held an offshore bond, which in turn provided access to investments such as student property.

Every layer could be explained individually. Taken together, the route was also information about the investment. When several structures are required before capital can reach an asset, the reasons for those layers deserve at least as much scrutiny as the destination.

V. When the Structure Owns the Asset

More elaborate structures can produce costs that are invisible when attention remains on the underlying investment. In one case, a client's home had been placed into a corporate entity within a QNUPS and represented most of the value of the arrangement. The client paid rent for occupation of the property, and the structure generated trustee fees, time-costed administration, corporate expenses and tax costs including ATED. With most of the value represented by the property itself, there was little liquidity inside the arrangement to absorb those costs.

Another QNUPS held a buy-to-let portfolio through a limited company. The individual wanted to run the property business directly, partly because routine trustee involvement was generating time-costed fees. The trustees considered that their responsibilities required continuing oversight. Matters such as tenant checks, insurance and property transactions could therefore require trustee involvement, including consultation over the proposed sale of a strip of land.

Both parties had understandable reasons for their positions. The individual was trying to operate the property business efficiently and the trustees were dealing with responsibilities created by the structure they administered. The architecture had placed authority and day-to-day economic activity in different places.

Structures carrying substantial assets have their own economics. Tax treatment at establishment is only part of the calculation. Administration, governance, liquidity and the ability to make ordinary decisions continue for as long as the structure exists.

VI. Family Capital

The phrase family wealth is useful shorthand for capital that may have very different ownership and governance underneath it. This becomes important when family investment companies are used across generations. Several family members can own different share classes in the same company while the company itself owns the assets. Their interests sit within one corporate balance sheet even when their objectives, ages and investment strategies differ.

A real discussion with a family considering a family investment company brought the problem into focus. Three siblings had interests across several property and investment businesses. All three were directors of much of the existing structure, although one sibling did most of the work. The proposed FIC would have brought more of the family capital beneath a common corporate structure.

We discussed a protected cell company as an alternative. Separate cells could accommodate different family interests and investment strategies while retaining a common architecture around them. The client immediately compared the concept with running restaurants through separate SPVs: a familiar commercial way of containing the affairs of one operation rather than allowing them to spread unnecessarily into another.

Business owners routinely understand distinctions that become blurred when the subject changes to family wealth. Capital belonging economically to the same family does not automatically require a common balance sheet, governance arrangement or investment strategy.

The choice between an FIC and PCC involves tax, jurisdiction, governance, cost and legal considerations beyond this paper. What matters here is that describing capital as belonging to one family tells us surprisingly little about the rights attached to each part of it.

VII. Ownership Through Time

Structures can also outlive the assumptions under which they were created. A trust deed, company or insurance policy can remain legally intact while tax legislation, residence or family circumstances change substantially around it. Planning undertaken correctly at establishment can therefore become inappropriate without anybody altering the structure itself.

We encountered this with two excluded-property trusts established while a client was living in the Bahamas. Their treatment following a later return to the UK had formed part of the original planning. Changes associated with the replacement of the UK's non-domicile regime altered that calculation.

The client's circumstances provided roughly two years before the intended return to UK residence. That period was used to deal with both trusts before the client came back to the UK.

The assets and trust documents had not changed. The legislation surrounding them had, and the client's movement between jurisdictions changed which legislation mattered.

Structural reviews therefore cannot sensibly consist only of establishing whether the original advice was correct. They also have to establish whether the architecture remains appropriate for the circumstances in which it now operates.

VIII. What Ownership Permits

Ownership determines a further set of boundaries. A consolidated statement can show a family with £20 million of capital without revealing who can sell particular assets, who can instruct the investment manager, whether capital can be distributed or whether two apparently adjacent pools can transact with each other.

Death provides perhaps the clearest stress test. Assets that appeared together on a family balance sheet can follow entirely different routes through an estate, pension scheme, trust, company or policy because the rights attached to them were different before death.

Pensions, companies, trusts, policies, nominees and cells can all be appropriate structures, but each changes the rights attached to capital in a different way.

Structural complexity cannot be judged simply by counting entities. Five structures can be excessive if four exist mainly to overcome a problem created by the first. A more elaborate arrangement can be justified where its boundaries perform useful functions: separating liabilities, preserving different family interests, changing tax treatment, providing succession or allocating control.

Alongside the value on the balance sheet sits a less visible set of rights: legal title, beneficial entitlement, access, investment authority, distribution powers and tax attribution. Those rights determine what the capital can actually do.