Family Investment Companies
The UK corporation tax rate is set to fall to 18% by 2020, making it one of the lowest in any of the G7 countries. This, coupled with the changes to the taxation of trusts in 2006, means that Family Investment Companies (FICs) are an increasingly popular option for those wishing to pass on significant wealth to the next generation, whilst retaining control of that wealth.
A FIC is a corporate structure whose shareholders are family members. It has carefully drafted governing documents to deal with distribution of profits, share transfers, return of capital and appointments to the board. The founder will retain control over investment decisions and decide when/if dividends will be paid. S/he will then bring in other family members as shareholders.
A FIC provides a way in which assets can be removed from an estate without triggering an immediate charge to inheritance tax (IHT). They have a number of tax benefits and disadvantages.
Investments are sheltered from income tax until profits are extracted
Payments made by way of dividend will be subject to dividend tax rates, which are low if the shareholder is a non-taxpayer or basic rate tax payer
Assets sold within the FIC are charged at corporation tax rates, which will be lower than the current Capital Gain Tax (CGT) rates by 2020.
Should the founder die within 7 years of the creation, IHT is chargeable on the value of the shares given away at the time the FIC was established; however any increase in value is considered to be outside of the estate.
There are no IHT lifetime charges as there would be with a trust.
A CGT charge may apply to non-cash assets transferred to the company
If the estate value is below the nil-rate band, a trust remains a more tax efficient option
There is an element of double taxation - profits are subject to corporation tax and then income tax when distributed to shareholders.
In summary, FIC’s offer considerable tax savings and other practical advantages in the right circumstances. However, your objectives and family needs should be understood before such an option is considered.
For more information please contact Eleanor Gadd, Associate, Private Client - Family.
Published: 29 Jul 2016