Family Investment Companies

A family investment company offers a flexible vehicle for managing family wealth and enables the tax-efficient accumulation and distribution of profits among family members.

Do you know?

Individuals establishing personal investment companies where they are the sole shareholder can also benefit from many of the features.

Family investment companies attempt to mirror the advantages of discretionary trusts and offer the founder a means to transfer value to other family members while still exercising an element of control.

ETC Tax has wide experience advising on the creation of family investment companies.

FAQs

Why are family investment companies popular?

There are a number of reasons for the popularity of family investment companies:

  • Changes to the taxation of trusts made them less attractive for holding family wealth. If appropriately structured, family investment companies can offer similar benefits but without the restrictions applying to trusts, in particular, the inheritance tax charge of 20% on contributions in excess of the trust settlor’s available nil rate band.
  • The divergence between the rates of tax applying to individuals and trustees (up to 45%) and companies (currently 19%) has provided a further spur toward incorporation and holding family wealth with a company.

How are family investment companies taxed?

Dividend income is generally exempt from corporation tax in the hands of the company.

Other income and gains realised by the company are subject to corporation tax (currently 19%, scheduled to reduce to 17% by 2020).

No inheritance tax on the establishment of the company or the subsequent gift of shares to family members. Unlike a trust, a family investment company is not subject to inheritance tax charges on each ten-year anniversary.

Relief is available to the company for interest on loans to acquire further investments. In contrast, individuals and trustees are not eligible for tax relief on interest on loans to acquire investments. The mortgage interest relief restriction applying to individuals and trustees also does not apply to companies and therefore a family investment company acquiring residential properties for investment, and using loans to acquire those properties, would be able to get full relief for the interest costs.

Relief is available for expenses incurred in managing the company’s investment and running its business. This includes investment manager’s fees whereas individuals are not eligible to claim tax relief for the expenses of managing an investment portfolio. The company may also be able to claim a deduction for salaries and pension contributions paid to or on behalf of the employees and directors of the company.

The result is that the family investment company will have more post-tax income available to reinvest and generate further income and capital growth than if the investments had been held by the individuals or trustees.

How can a family investment company assist with inheritance tax and estate planning?

A family investment company can assist with inheritance tax and estate planning in a number of ways.

When the company is incorporated, shares can be gifted to family members without incurring any immediate charges on the basis that they have little or no value at the date of incorporation and therefore there are no concerns with capital gains tax. The gift of the shares will be treated as a potentially exempt transfer for inheritance tax and therefore outside the estate of the donor provided they survive at least seven years. If the donor dies within seven years, it will be the value of the shares at the date of the gift, rather than at the date of death, that is brought into their estate and subject to inheritance tax.

Should the donor continue to hold shares in the family investment company at the date of death, the value of those shares will be continued to reflect the size of the shareholding and restrictions imposed in the articles and any shareholder agreement on the sale of those shares. The discount might be substantial meaning that the value remaining in their estate is significantly less than the percentage shareholding.

If the family investment company was funded by way of loan, that loan will remaining within he founding shareholder’s estate for inheritance tax purposes. However, they could consider gifting that loan to other family members allowing them to receive tax-free repayments of the loan. The value of the loan would fall outside the founder’s estate after seven years.

Shareholders will be subject to tax on profits extracted from the family investment company.

If the original shareholder funded the company by way of loan, repayments of that loan can be made without incurring any additional tax liabilities.

Are there benefits of family investment companies beyond taxation?

The potential benefits extend beyond taxation.

The directors control the company, including its investment decisions, the timing and to whom distributions of profits are made. It is therefore not necessary for parents, for example, to retain a majority shareholding to continue to exercise control.

Family investment companies can provide a measure of protection against the dissolution of family wealth on divorce. For example, the company’s articles can be drafted in such a way as to prevent the transfer of shares outside the family. Further protection against the transfer of shares outside the immediate family such as the requirement for shareholders to enter into pre-nuptial agreements could be included in a shareholder agreement.

Unlike other tax-wrappers, family investment companies are not subject to Financial Conduct Authority regulation and can invest in a wide range of assets.

Are family investment companies a replacement for trusts?

Trusts remain useful in the right circumstances and for many families they remain the most flexible and appropriate vehicle for the managing of their wealth.

For example, while the transfer of cash in excess of the nil rate band into a trust will give rise to an immediate charge to inheritance tax, shares or other assets benefiting form business property relief can be transferred into trust without giving rise to any inheritance tax liabilities. Shares in a family company might therefore be transferred into trust prior to the sale of the business to a third party, but before there is any binding contract for sale, and the value passed into trust without any immediate charges to inheritance tax. The trustees would then receive a share of the process of sale of the business and are free to reinvest those proceeds on behalf of the beneficiaries of the trust.

It might also be appropriate that a trust is used to hold at least some of the shares in a family investment company. This can be especially attractive for creating a pot of income that might be used to provide distributions to family members who are not named shareholders of the family investment company.

Do you have a question about family investment companies?

Speak to one our Chartered Tax Advisers