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What Is A Family Investment Company?

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What Is A Family Investment Company?

What Is A Family Investment Company?

Trusts have traditionally been utilised by wealthy families and individuals as part of their tax and succession planning.

However since the changes to the taxation of trusts in 2006 which introduced an initial 20% Inheritance Tax charge for assets transferred into trust above the Nil Rate Band Threshold (currently £325,000) they have been less attractive.

This has been amplified in recent years as the Nil Rate Band Threshold has remained frozen at the current amount since 2009. As a result Family Investment Companies have become increasingly popular amongst those with significant wealth due to the favourable tax treatment and flexibility.

A Family Investment Company (“FIC”) is an alternative to family trusts as a vehicle to preserve family wealth and mitigate taxes. An FIC is a UK private company (limited or unlimited) that is controlled and run by its directors (usually the parents), with family members (usually children) owning the shares that hold capital value of the assets. An FIC enables parents to retain significant control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.

How are they established & operated?

There are many different ways to set up and operate an FIC, but common features include:

  • FICs are generally newly incorporated companies set up for this particular purpose.
  • If the FIC is set up as a limited company, it is necessary to file annual accounts with Companies House. Alternatively, to maintain privacy, the FIC can be set up as an unlimited company where no requirement to submit annual accounts is required.
  • Once the company is set up the parents can transfer cash or assets to the company by way of a loan, which is then invested by the FIC.
  • The parents subscribe for voting shares (preferential shareholder) in the FIC and are named as directors, having exclusive voting control within the company at shareholder and board level. This means that parents will have all the voting rights but no rights to the capital.
  • The directors will determine when dividends are paid and will make general management decisions of the company. Where cash is transferred there are no tax consequences on the initial loan of funds.
  • Where assets being transferred are investments then capital gains tax could arise, with the assets being valued at market value under TCGA 1992 s 17. Stamp Duty may also be payable.
  • Over time the loan can be repaid by giving a post-tax form of income to the parents. Alternatively, the loan could be  gifted/assigned to other shareholders (junior family members) where the capital value is no longer needed. The gift/assignment of the loan would be a Potentially Exempt Transfer under IHT, providing the parents survive seven years from the date of the gift. If they die within the seven-year period then Taper Relief (IHTA 1984 s 7(4)) may be available reducing the Inheritance Tax payable.
  • On creation, other family members/children are issued a separate class of shares benefiting from the majority, if not all, of the rights to dividends and income.
  • The issue of new shares does not give rise to a stamp duty liability and as the FIC is not worth anything at the outset there is no gift for inheritance tax or capital gains tax purposes. The ability to hold shares being limited to specified categories of family members or family trusts.
  • The Articles and Shareholders Agreement are drafted to protect the shares from sale outside of the family, making this type of structure more effective in a divorce or dispute.
  • The issue of new shares does not give rise to a stamp duty liability and as the FIC is not worth anything at the outset there is no gift for inheritance tax or capital gains tax purposes.
  • The ability to hold shares being limited to specified categories of family members or family trusts.
  • The Articles and Shareholders Agreement are drafted to protect the shares from sale outside of the family, making this type of structure more effective in a divorce or dispute.
How are they taxed?

Corporation Tax

Profits and gains of an FIC are charged at corporation tax rates, which are significanty lower than the equivalent income and capital gains rates charged on individuals. Currently, corporation tax is at 19% but this is expected to increase to 25% in April 2023.

Capital Gains

Chargeable gains are subject to corporation tax and are included on the corporation’s tax return.

Dividends

Most dividends received by a UK company are exempt from tax, however, if the company invests in foreign companies dividends may be subject to withholding tax.

Shareholders are taxed at various rates on dividends after the £2,000 allowance, from 7.5% for basic rate taxpayers, 32.5% for higher rate and 38.1% for additional rate taxpayers.

Income Tax

As with directors and shareholders of the FIC, it would be possible to pay a salary and benefits to those managing the company as well as pension contributions, subject to the usual rates of tax and NIC.

Tax reliefs and expenses

There are many tax reliefs and expenses that are only available to companies and not individuals. These include, but not limited to, loan interest deductions, where the loans are used for the purposes of the company’s business and allowable revenue and capital expenditures and management expenses.

Who are they suitable for?

A FIC is generally most suitable for those with substantial funds to invest (at least £1m plus) and who are able to keep the funds within the company for a lengthy period thereby giving the company and underlying investments time to grow. Due to their relative complexity FICS are often attractive to business owners and those with experience of running a company. Whilst there are costs associated with creating and running a FIC these costs are likely to be a fraction of the Inheritance Tax liability which would have arisen had the same funds been invested through a traditional trust structure.

Summary of benefits

  • Wealth preservation for future generations
  • Cash transfers into the company are tax-free
  • Retaining control over investment decisions
  • Taxation
  • Privacy
Get in Touch

Our Family Investment Company Team is part of EMW Wealth. Take a look at the EMW Wealth Brochure here

We regularly advises clients with global heritages and/or worldwide residences in relation to Family Investment Companies. If you would like advice on this matter, please get in contact with Daniel Wilson.

The information contained in this leaflet is or general information purposes only and is not legal advice, which will depend on your specific circumstances. © 2021 EMW Law LLP