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Taxation of Family Investment Company Shareholders

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

UK Taxation of Family Investment Company Shareholders

Income Tax, Dividends, Salaries, Capital Distribution & FICs – Background

This article considers the taxation of the shareholders of the company rather than the internal taxation of the Family Investment Company.

Income Tax & Family Investment Companies

Dividends

If the FIC pays the shareholder a dividend then this will be subject to income tax. The current rates are as follows:

  • To the extent it falls within the personal allowance and / or the dividend allowance: 0%;
  • To the extent that it falls within the basic rate band: 7.5%;
  • To the extent that it falls with the higher rate band: 32.5%; and
  • To the extent that it falls with the additional rate band: 38.1%

Salaries Paid to Directors / Employees

If the director or employee receives a salary or bonus from the Company then this will be subject to the recipient’s marginal rate of tax:

  • To the extent it falls within the personal allowance: 0%;
  • To the extent that it falls within the basic rate band: 22%%;
  • To the extent that it falls with the higher rate band: 40%; and
  • To the extent that it falls with the additional rate band: 45%

The payment of salary or a bonus will be subject to National Insurance Contributions as well.

Capital Gains Tax (“CGT”) & Family Investment Companies

Sale or transfer of shares

The sale or transfer of shares in the FIC will be subject to CGT to the extent there is a chargeable gain.

In reality, it is more likely that CGT may arise on the gift of shares to another family members. CGT will only be payable to the extent that it exceeds the Annual Exemption for CGT,

Capital Distributions

A capital distribution might arise on the liquidation of the company. The default position is that this would be subject to CGT.

However, there are wrinkles (this is the UK tax system after all). A capital distribution on liquidation may be treated as an income distribution and subject to the dividend rates set out above.

This treatment will generally apply where the recipient carries on a similar business to that undertaken by the liquidated company in the two-year period following the capital distribution.

Inheritance Tax (“IHT”) & Family Investment Companies

The net value of any shares held in the FIC at the time of death will be subject to IHT on death. Any gifts made by the deceased within 7 years of death are also likely to be subject to IHT.

If most of the assets of the company are direct interests in trading assets then the shares in the business may, wholly or in part, qualify for Business Property Relief (“BPR”). However,in this context, this might be a complex analysis.

Non-UK Family Investment Companies

General

It might be desirable to use a non-UK company rather than a UK one. (Read More…)

However, one needs to be very mindful of various anti-avoidance provisions.

Income Tax & Family Investment Companies

The first significant anti-avoidance provision will be what are referred to as the Transfer of Assets Abroad rules.

Where there are UK shareholders and non-UK income within the FIC that otherwise would not be subject to UK tax then HMRC effectively has the ability to look through the Company for tax purposes meaning the stakeholder will be subject to income tax on the profit personally.

There are two defences against these provisions:

  • A commercial defence; and
  • An EU defence

As such, where one is using a non-UK company be aware of these anti-avoidance rules and choose the location of the FIC wisely.

CGT & Family Investment Companies

Similarly, where a non-UK company sells assets which would otherwise be outside of UK CGT and there are UK based shareholders then one needs to consider anti-avoidance rules which can attribute some or all of the gain to that UK based shareholder.

Other Anti Avoidance Tax Rules…

Other anti-avoidance rules may also be relevant.

If you have any queries regarding thetaxation of Family Investment Company Shareholders, or FICs generally, then please get in touch.

 

 

Please see our full Signpost document regarding Family Investment Companies for more information on these vehicles.

Taxation of Family Investment Company Shareholders was last updated on 16 December 2019

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