Introduction & Considerations for Family Investment Companies
Family investment companies are an increasingly popular vehicle for holding investments.
A family investment company is, simply, a company established to hold the investments of a family, the members of whom may hold shares in the company, either directly, or indirectly as the beneficiaries of a family trust.
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We set out below five reasons to consider a family investment company.
The rates applying are lower than income tax. While income tax can be charge at up to 45%, corporation tax is charged at 19%. Therefore, there is a significant advantage if the intention is to retain funds within the company and reinvest.
Moreover, certain receipts are corporation tax-free. While interest income and rents are subject to corporation tax, dividends are not. A family investment company which holds a portfolio of equities will therefore be able to realise the income tax-free.
Relief for interest
Family investment companies can obtain relief for interest paid. This is especially relevant for those who would like to invest into property since from 6 April 2020 onwards, relief for interest payments to acquire residential properties are limited to a basic rate tax credit. The result is that higher and additional rate taxpayers will not be able to benefit from full tax relief for the interest costs incurred.
These limitations do not apply to companies and therefore a family investment company building a buy to let portfolio will be able to obtain relief for its interest costs in full.
Interest can also be deducted for the purpose of purchasing other investments too.
Relief is available for expenses incurred in managing the company’s investments and running its business. This includes investment management fees. In contrast, individuals are not eligible to claim tax relief on the expenses of managing investment portfolios.
A company may also be able to claim a deduction for salaries and pension contributions paid to or on behalf of the employees or directors of the company.
Inheritance tax and estate planning
While the value of the shares are within the holder’s estate, it may be possible if a new vehicle is established to create a class of shares which has limited current value and which can easily be given away.
When the company is incorporated, shares can be gifted to family members without incurring any immediate tax charges on the basis that they have little or no value at the date of incorporation.
Should the donor continue to hold shares in the family investment company at the date of death, the value of those shares will be discounted 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 remain within the 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. After seven years, the value of the loan would fall outside the founder’s estate.
These are some of the tax reasons to consider a family investment company. But there are non-tax reasons too including the ability for the founders, provided the careful drafting of appropriate articles and shareholder agreements, to continue to exercise some control over the company while passing value to children or other family members.
If you would like to discuss how we can assist with establishing a family investment company, please get in touch.