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29 August 2018
Family Investment Companies (FICs) and Personal Investment Companies (PICs) are an increasingly familiar feature of the tax-planning landscape.
FICs provide a flexible vehicle for the holding of investments and permit the tax-efficient accumulation and distribution of profits to family shareholders. Individuals establishing personal investment companies, where they are the sole shareholders, can also benefit from many of their features.
There are a number of reasons for the growth in popularity of FICs:
Family investment companies are bespoke structures. However, a typical situation is as follows.
Having exited a successful business, an individual decides that he wishes to tax-efficiently share his good fortune with the wider family. Rather than contribute those funds to a trust, which could result in immediate charges to inheritance tax, he incorporates a new company, with different classes of share to be held by various members of the family. He funds the company by way of an interest-free loan and the company, in turn, invests those funds in a portfolio of shares and securities.
The founder is able to access funds from the company by way of repayment of his loan while family members can be remunerated by dividend payments.
Ongoing Taxation of Family Investment Companies
The key advantages of a family investment company include:
The result is that the FIC will have more post-tax income available to reinvest and generate further income and capital growth than if investments had been held by individuals or trustees.
Shareholders will be subject to tax on profits extracted from the FIC.
Dividends will be subject to tax at the appropriate marginal rate (7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate taxpayers). For taxpayers with no other sources of income, up to £13,850 of dividends can be paid in the 2018/19 tax paid in the 2018/19 tax year without incurring any further taxation (i.e. using their personal allowance of £11,850 and dividend allowance of £2,000).
If the original shareholder funded the company by way of loan, repayments of that loan can be made without incurring any additional tax liabilities.
Ultimately the company might be liquidated in which case distributions to shareholders should be treated as capital distributions and subject to capital gains tax at 10% or 20% to the extent that they are basic or higher rate taxpayers.
Inheritance tax and Estate Planning
The potential benefits of FICs extend beyond taxation.
As a tax-wrapper, a FIC is not subject to Financial Conduct Authority regulations and can invest in a wide range of products.
The directors control the FIC, including its investment decisions and when and to whom distributions of profits are made. It is not necessary for parents, for example, to retain a majority shareholding to continue to exercise control. The articles can prevent a transfer of shares other than to certain family members or family trusts and the value of the shares will further be reduced by the restrictions in articles and shareholder agreement.
Further protection against the transfer of the shares outside the immediate family such as the requirement for shareholders to enter into pre-nuptial agreements could be included in a shareholder agreement.
Family Investment Companies vs Trusts
Changes in the taxation of trusts in 2006 have been a key driver of the growing popularity of family investment companies.
Nevertheless, trusts remain useful in the right circumstances and for many families they remain the most flexible and appropriate tax-planning vehicles. 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 from reliefs such as business property relief can be transferred into trust without giving rise to any 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 proceeds 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 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 in the FIC.
FICs attempt to mirror some of the advantages of discretionary trusts and provide a means of transferring value to other family members while still permitting the retention of control. For many families, trusts will remain the most flexible wealth planning vehicles; however, FICs come into their own where the value of the assets to be transferred are such that they would be subject to an immediate 20% lifetime inheritance tax charge.
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