24 September 2019
Wealth planning & Private client
For many business owners, securing wealth for the next generation is of paramount importance. Doing so in the most tax efficient manner and in a way that enables you to maintain control over your assets is also vital. Enter the Family Investment Company.
Daniel Morgan, explains the key benefits.
For a while now, trusts have been the preferred means of securing wealth and reducing Inheritance Tax in the long term. However, years of changes to the tax regime have made trusts less appealing as a succession-planning tool.
So what is the alternative?
Introducing the Family Investment Company (FIC). Simply put an FIC is a private company in which the shareholders are family members across different generations. The makeup of a Family Investment Company differs vastly from situation to situation and there are numerous variations in the structure, ownership and assets within FICs – which is part of the appeal.
How do Family Investment Companies work?
In broad terms, a limited company is set up and incorporated with several different classes of shares to enable flexibility over the payment of dividends. Shares can be subscribed for, or gifted, to different family members.
Key tax benefits of a Family Investment Company
There are no upfront Inheritance Tax charges on funding the FIC and giving family members shares
UK and most non-UK dividends received by the FIC are exempt from tax, as opposed to being taxed at up to 38.1% - the top rate of Income Tax on dividends for an individual
Income earned in the FIC is subject to Corporation Tax at 19% as opposed to being taxed personally at up to 45%.
Capital gains in a FIC are subject to Corporation Tax as opposed to Capital Gains tax
Dividends and salaries can be paid to the various shareholders to enable use of their personal allowances and basic rate bands
While the initial value of cash or assets in the FIC will be subject to IHT in the estates of those who set up the FIC, it does provide protection for the growth in value of those assets.
FICs aren’t however just about tax planning; central to their appeal is the ability to provide control over the family’s wealth in the future.
Additional benefits of a Family Investment Company
Any shareholder can be a director in an FIC but in most cases, the directors are the individuals who provide the FICs working capital – and the structure enables them to retain total control over investment decisions.
Where there are very young family members or family members in unstable circumstances, a family trust can be set up as a shareholder to hold shares for these individuals – thus providing additional protection against the impact of divorce or family disputes.
Using growth shares in an FIC can also serve as an incentive for family members who are active in the business, to secure support for the long-term growth plans of the owner.
FICs can be used to remove excess cash from trading companies and there are circumstances in which FICS are being used to hold rental or investment properties – these are complex areas of planning with many factors to consider, but they can be effective depending on your long-term objectives.
Family Investment Companies offer flexibility and can be personalised to your specific circumstances. They can be a valuable tool for facilitating wealth and estate planning while enabling the founders to exercise control over that wealth.
However, the bespoke nature of FICs means they are complex and planning should be done with experts who have experience in this field.
For tax planning and advice on estate planning, get in touch with our tax team.