A Hybrid company is a financial vehicle used mainly for offshore estate planning. The unique tax benefits afforded to expats are an excellent opportunity to reduce the income tax liability of your heirs.

Mainly used as a form of reducing inheritance tax bills, a Hybrid company is simply a company, formed offshore, to protect your assets in a similar fashion to a traditional offshore trust. A Hybrid has a unique ownership set-up with two distinct classes: Shareholders and Guarantee Members. A guarantee member is ‘voted’ into membership of the company and agrees to liability for a nominal amount of debt and gains the benefits of all company dividends. This is all set out in the companies Articles of Association which sets out the rights and obligations of all parties.

The shareholders in a Hybrid company have full control over the company, but unlike the traditional role of shareholders, have no right to the dividends. Guarantee members have no voting rights and no control but receive all company dividends; as per the Articles of Association.

Please refer to the image below for a graphical representation:

Hybrids are structured to include the benefactors of your estate as second tier guarantee members (in this example, your children are the second tier members).  On the death of the first tier members, all benefits and obligations pass directly to the second tier members.

An offshore trust is set up so that the Trustee looks after the interests of the Settlor for the benefit of the Beneficiary (who may or may not be the Settlor). This is similar to a Hybrid, whereby the shareholder acts as a trustee and the guarantee member is the beneficiary. The main differences occur both in the reporting of information and the classing of assets within both set-ups. The reporting difference between a trust and a hybrid company means that, whilst a trust has to be declared to HMRC as part of your estate, a hybrid company doesn’t.

When it comes to passing trust benefits on to an heir, the assets are liable to inheritance tax. Due to the unique structure of a Hybrid company there are no assets to be passed on, therefore no inheritance tax and no need to obtain probate.

Hybrids do not have to be formed as illustrated above; there is a lot of flexibility regarding the rights and obligation attached to each class of membership, shareholder and director. A Hybrid company will not suit everyone; it is an intricate method of estate planning and should be discussed, in detail, with your financial adviser.

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©Michael Brinksman