Family Investment Companies (FICs) are growing in popularity as a tax-efficient way to hold, control, and pass on family assets.
Each FIC is bespoke and tailored to the unique circumstances of each founder and their family. It can be a non-trading company, holding wealth which is surplus to the founder’s everyday needs.
The FIC incurs no upfront inheritance tax, yet the founder retains complete control of investments and dividends, and there is no restriction on how much can be held in the company. That makes it an attractive alternative to trusts.
As long as the founder uses cash to subscribe for the company’s shares, there are no immediate tax consequences.
The founder initially becomes the sole director who holds all the voting shares. Non-voting shares, which carry rights to capital and income, can then be gifted to family members by the founder. The gift is treated as a potentially exempt transfer, putting it outside the founder’s estate for inheritance tax purposes after seven years. Some transfers, however, would have capital gains or stamp tax implications.
There are other potential tax advantages. The FIC pays corporation tax on its income and capital gains generally. That rate is currently 19 per cent and, significantly, it is apparently due to fall to 17 per cent by April 2020 – this would widen the differential between corporate and personal tax rates. Most dividends received by the FIC are exempt from corporation tax, regardless of whether the dividend comes from the UK or overseas. So investments can grow faster.
Dividends to the family shareholders follow normal rules, so they will pay income tax at their marginal rate, with the first £5,000 currently free of tax. However, that allowance is due to fall sharply to £2,000 in April 2018.
For the founder, funding the FIC by way of a loan means dividend taxes can be avoided. The loan can be repaid or drawn down out of company profits.
For adult children, dividends from the FIC could be an efficient way to fund their higher education costs. As with trust restrictions, children’s FIC shares can be restricted to protect those shares in the event of a later family breakdown.
The FIC is flexible. Control can be handed over gradually, through share transfers and/or the appointment of other family members as directors. The founder protects his assets, limits his liability, and is passing on the maximum value of those assets to the next generation.
There are some (though not necessarily substantial) costs and administration associated with a limited company. Unlike a trust, the FIC is subject to the Companies Act, so its accounts are open for public inspection. There is also the potential hazard of double taxation. For instance, the company may pay tax on a gain and the founder may then also be taxed by taking it out as a dividend. Finally, there is always the risk of changes to tax rules.
FICs have undoubted attractions, but specialist legal and tax advice is essential. With IM Private Wealth, there is no need to bring in external accountants for the provision of tax advice, as all of the expertise is in-house.
Download our guide on FICs
Seminar - The Private Wealth and Corporate teams will be holding a seminar on the creation of FICs in our London office on 25 January 2017. See here for more details.
Published: 22 November 2017
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