04 November 2021

Securing your wealth using a Family Investment Company (FIC)

Services:

Corporate Tax Planning,

Personal Tax Planning

As a business owner, securing your wealth for future generations is a key concern. Making sure you secure your wealth in the most tax efficient way is critical. This is where a Family Investment Company could be used. Below are all the details you need to know about Family Investment Companies (FIC)

                                  

What is a Family Investment Company?

A Family Investment Company (FIC) is a private company that is controlled and run by its directors (usually the parents), with the parents and other generations of a family owning the shares.

 

How do Family Investment Companies work?

A FIC can be used by the parents who want to transfer value to family members (or other individuals) but retain some control over the assets.

The FIC can be incorporated with different classes of shares. Each class should have the same rights (voting rights etc), but the different classes allow greater flexibility in how and to whom dividends are paid. This flexibility means that an FIC is a very bespoke way to deal with your family’s structure or complexities. They can be made up of different structures, ownership, and assets.

 

What are the benefits of an FIC?
  • Because an FIC is a company it does not pay tax on UK (and most non-UK) dividend income, compared to the maximum tax rate on dividends for individuals of 38.1%.
  • Other income in a FIC, whether interest or rental profits, is subject to corporation tax of 19%, compared to the maximum tax income tax rate of 45%.
  • Furthermore, companies are not subject to the restriction on tax relief on mortgage interest, and other finance costs, that individual investors are.
  • For capital gains, again, companies pay 19% corporation tax compared to the maximum individual capital gains tax (CGT) rate, for a high-rate taxpayer, of 20%. For individuals, this rate increases to 28% where the gain is on a residential investment property.
  • Dividends and salaries can be paid to the shareholders to utilise personal allowances and basic rate tax bands.
  • Surplus cash could be used to pay pension contributions for the directors.
  • The FIC can be funded with cash or non-cash assets, such as property and other investments, owned by family members.

 

Other things to consider
  • Companies do not benefit from the annual CGT exemption given to individuals, which is currently £12,300.
  • Non-cash assets will be deemed to be transferred at their market value, so a capital gains tax (CGT) charge may arise on the difference between their current market value and the original cost. However, such transfers can be staged over several tax years to maximise each year’s annual CGT exemption.
  • If property is transferred, stamp duty land tax (SDLT) would also be payable by the company, based on the market value of the property. If the property is residential, a 3% additional SDLT rate would be levied on top of the normal SDLT rates.
  • The shares in the FIC will ultimately not benefit from any inheritance tax (IHT) reliefs upon death, such as business property relief (BPR), due to it being an investment company, not a trading company.
  • However, shares gifted during a shareholder’s lifetime will be treated as potentially exempt transfers (PETs) and will escape an IHT charge if the donor survives seven years.

 

Inheritance tax planning with FICs can be a tax efficient way of passing on the shares in the FIC to other family shareholders where possible. The flexibility they provide whilst maintaining control over your wealth can be attractive to business owners.

However, the flexibility offered means that an FIC can be complex to set up so it’s worth seeking professional advice from people who are experienced in Family Investment Companies.

For FIC and other tax planning advice, don’t hesitate to get in touch with our offices in Chester, Wirral and Liverpool, we'd be happy to speak with you.

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