The concept of the Family Investment Company (“FIC”) is not a new one, but it has been modified and developed significantly over the past few years to become a very popular alternative to trusts in providing income tax planning as well as wealth protection for families.
If you have children or ageing parents and higher rate income, or assets or within the family that may be subject to inheritance tax, then a family investment company may provide significant tax advantages, both in the short and the long term.
What is a FIC?
A FIC is a company with a bespoke constitution (known as its Articles of Association), which are written to form a family-owned and controlled investment company. A bespoke constitution allows for tax-efficient income distribution across family members as well as a shelter from inheritance tax for assets such as property, art, and equities.
A FIC’s constitution can be made to be extremely flexible and is generally limited only by the imagination of the family and their advisers. It is possible to put a structure in place that will achieve the aims and goals of the family with regard to income planning, succession planning and wealth preservation whilst still providing the flexibility to adapt to changes in family circumstances that happen over time. Control over assets can be retained by senior family members and or those people transferring the assets.
In a similar way to a trust, a FIC provides for the separation of the ownership and management of the assets. This allows parents and grandparents to control how monies are invested and determine how much – if any – cash should be paid out to shareholders. Every UK resident taxpayer has a personal allowance from the day they are born, and so from a short-term income tax planning perspective, those allowances can be effectively utilised within a FIC.
A particularly valuable long-term benefit is that value of the FIC’s shares and its underlying assets sits in the hands of the next generation and thereby provides a shelter from Inheritance Tax.
Being incorporated as a limited company rather than as a trust means that the vast majority of our clients are familiar with the structural concepts and administrative requirements such as accounts and tax formats, making a FIC the perfect solution for managing family income and wealth.
What are the benefits of a FIC?
The major benefits of a FIC are those of tax efficient income planning, inheritance tax planning, and wealth protection. These benefits can be realised whilst still ensuring control remains with the senior members of the family and those that transferred assets to the FIC.
The key tax benefits are found in the ability to carry out effective annual income tax planning as well as longer term estate and inheritance tax planning.
Income Tax Planning
Tax efficient accumulation of income
- FICs are extremely efficient for accumulating income and capital gains as corporate tax rates (19%) are generally lower than personal tax rates – particularly for older generations who tend to be higher (40%) or additional rate (45%) taxpayers.
- Dividends received from share portfolios owned by the FIC will normally be exempt from corporation tax.
- It’s possible to obtain a corporation tax deduction in respect of interest on loans taken out against the value of the FIC’s investments. This compares favourably with the position of an individual who would receive no interest relief on a loan to acquire a share portfolio and only basic rate relief on a mortgage to acquire a property.
- Management expenses that a FIC incurs in respect of its investments and in running its business (including salaries and pension contributions for directors) should be eligible for corporation tax relief whereas similar costs incurred by individuals would generally not be relievable against income tax.
- Any tax losses for the FIC can be carried forward and offset against its future profits.
Tax efficient extraction of profit from a FIC
- Dividends can be paid on different share classes, making it possible to allocate income to low tax or non-taxpaying family members in preference to higher and additional rate taxpayers.
- Dividends can be paid into a family trust and distributed out to the intended beneficiaries allowing younger and or less responsible family members to benefit from the income of the FIC without giving them control over the shares.
Estate and Inheritance Tax Planning
- It’s possible to transfer wealth to future generations in a tax efficient manner by carefully managing the class rights of the FIC’s shares.
- With careful planning, it is possible to avoid any immediate charges to tax when gifting shares in the FIC.
- It is possible to “give away” the future growth in value of the assets to the younger generation whilst preserving some or all of the historical value to the older generation, which can then be drawn upon to reduce the value of their estate moving forward.
- Where the donor of the gift of FICs shares survives for seven years, the value of the gift will fall outside of their estate for inheritance tax purposes, potentially avoiding up to 40% in tax on assets passed on.
- Due to the way HMRC tends to view share valuations, it is possible to use “minority discounts” to cause some of the value of the FIC to escape IHT completely.
What if something changes in the family?
This is a very common question as families and the relationships within them rarely remain static. Family disputes as well as bankruptcy, death and divorce are a sad fact of life. Measures to deal with these eventualities could be to include the following example provisions within the Articles of Association:
- Compulsory share transfers in respect of divorce, death, or bankruptcy to a defined class of people.
- Provisions to prevent non-lineal descendants from owning shares.
- Provisions such that share transfers can only take place to a “permitted class”.
- Setting a dividend policy for the FIC which cannot then be overruled by a Court.
- It is also possible to layer in further protection by making one of the shareholders a discretionary trust giving the trustees the power to exert control over the transfer of any shares or income to the beneficiaries.
- The day-to-day management and control of the FIC would rest with its directors so decision-making with regard to what investments to make, the level of any dividend or to whom the dividend is paid can be controlled by a select group.
- It is possible to give weighted voting to some share classes to provide more control to certain groups.
- Control over changes to the structure of the FIC or its management could be held by the Board of Directors or a certain class of shareholder.
In the current economy and with a government needing to bolster its coffers it is widely anticipated that the capital gains tax rate will increase in the near future and, if there was ever a time for income, wealth and estate taxes to increase, the largest government budget deficit in peacetime history is possibly the cover needed. Family Investment Companies provide the opportunity to protect the income and wealth of you and your loved ones in a relatively straightforward manner and with the flexibility to adapt to future changes to legislation as well as within your family.
Please contact us if you are interested in discussing how a FIC could help you with your family’s tax planning.