Family investment companies (FIC) have grown in popularity in recent years and are used for numerous purposes but most commonly for succession planning and as a tax efficient estate planning vehicle.
An FIC is formed as a limited company with the shares held by family members and offers a well-known and flexible vehicle, as an alternative to trusts for inheritance tax planning. An FIC essentially invests rather than trades and may hold investments such as property or equity portfolios.
How does it work?
An FIC is normally established with a founder share held by the individual providing the capital. Cash or assets are then transferred into the company either by way of gift or in return for a loan. Any profits arising from the investments would then be subject to corporation tax, with the individual shareholders subject to tax on any distributions.
The tax implications of transferring assets in should be carefully considered as capital gains tax is likely to be triggered, as well as SDLT on any transfers of property and there may also be inheritance tax (IHT) implications.
New classes of shares may then be created, generally with different rights to the founder share(s) and issued to the next generation. For example, the parents may have the voting rights in the company but only a small percentage of the capital rights, with the majority held by the children.
Funds are then potentially extracted by way of repayment of the loan for the founder and any growth in the value of the company should then be sheltered from IHT as the children would own the capital rights. The flexibility of an FIC, over a trust, comes with the founder being able to continue to participate in profits generated by payment of dividends, as well as retaining control over the assets.
When might an FIC not be appropriate?
In some cases, transitioning to an FIC structure may not be appropriate, particularly where there are significant dry tax charges upfront. Some points to be aware of when considering an FIC structure include:
- There could be significant SDLT and/or capital gains tax charges on transferring properties to a company which could prove cost prohibitive as mentioned above. In some cases these can be mitigated, but this would be dependent upon the facts and circumstances of the existing property business.
- On transfer of assets to the company there could potentially be an IHT charge if the properties are gifted in and there is a reduction in the value of the parents’ estate. This would depend on the specific facts, however, and in some cases an IHT charge may be avoided on transfer.
- The ongoing costs of operating via a company should be considered including;
- annual filing obligations and costs;
- potential charges under the ATED regime (Annual Tax on Enveloped Dwellings) which applies for residential properties held by a company with a value of £500,000 or more although some exemptions apply including for rental properties; and
- overall tax cost of operating via a company with particularly with the recent increase to corporation taxes as well as subsequent income tax levied on any distributions.
The above is merely a summary; the tax implications of an FIC can be complex and determining the best structure will be dependent on a number of factors including the assets to be transferred and the short- and long-term objectives of the original owner(s).
If an FIC is not appropriate, there are a number of other options which could be considered including holding the assets via a trust or even a hybrid trust/FIC approach.
Please get in touch if you would like any help with exploring the possible options along with the associated tax implications as part of your wider estate planning strategy.