Nick Lloyd.
Family Investment Companies are proving an attractive option as part of a modern succession planning strategy. Daniel Wilson and Nick Lloyd, EMW’s experts in the field, explain more.
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Published in association with
TRUSTS have traditionally been used by families and individuals as part of their succession planning. Since the changes to the taxation of trusts in 2006, trusts have been less attractive.
The Nil Rate Band Threshold has remained frozen at the current amount since 2009 and as a result Family Investment Companies have become increasingly popular amongst those with significant wealth due to the favourable tax treatment and flexibility.
A Family Investment Company is an alternative to family trusts as a vehicle to preserve family wealth and mitigate taxes. A FIC is a UK private company (limited or unlimited) that is controlled and run by its directors (usually the parents), with family members (usually children) owning the shares that hold capital value of the assets.
A FIC enables parents to retain significant control over assets while accumulating wealth in a tax-efficient manner and facilitating future succession planning.
How are they established & operated?
- FICs are generally newly incorporated companies set up for this particular purpose.
- If the FIC is set up as a limited company, it is necessary to file annual accounts with Companies House. Alternatively, to maintain privacy, the FIC can be set up as an unlimited company with no requirement to submit accounts.
- Once the company is set up, the parents can transfer cash or assets to the company by way of a loan, which is then invested by the FIC.
- The parents subscribe for voting shares in the FIC and are named as directors, having exclusive voting control within the company at shareholder and board level. This means that parents will have all the voting rights but no rights to the capital.
- The directors will determine when dividends are paid and will make general management decisions for the company.
- Where assets being transferred are investments then capital gains tax could arise, with the assets being valued at market value under TCGA 1992 s 17. Stamp Duty may also be payable.
- Over time the loan can be repaid by giving a post-tax form of income to the parents. Alternatively, the loan could be gifted/assigned to other shareholders (junior family members) where the capital value is no longer needed.
The gift/assignment of the loan would be a Potentially Exempt Transfer under IHT, providing the parents survive seven years from the date of the gift.
- On creation, other family members/children are issued a separate class of shares benefiting from the majority, if not all, of the rights to dividends and income.
- The issue of new shares does not give rise to a Stamp Duty liability and as the FIC is not worth anything at the outset there is no gift for inheritance tax or capital gains tax purposes. The ability to hold shares is limited to specified categories of family members or family trusts.
- The Articles and Shareholders Agreement are drafted to protect the shares from sale outside of the family, making this type of structure more effective in a divorce or dispute.
- The ability to hold shares being limited to specified categories of family members or family trusts.
How are they taxed?
Corporation Tax
Profits and gains of a FIC are charged at corporation tax rates, which are often lower than the equivalent income and capital gains rates charged on individuals. Currently, corporation tax is 25% in most cases.
Capital gains
Chargeable gains are subject to corporation tax and are included on the corporation’s tax return.
Dividends
Most dividends received by a UK company are exempt from tax. However, if the company invests in foreign companies, dividends may be subject to withholding tax.
Shareholders are taxed at various rates on dividends after the £500 allowance: 7.5% for basic rate taxpayers, 33.75% for higher rate and 39.35% for additional rate taxpayers.
Income Tax
As with directors and shareholders of the FIC, it would be possible to pay a salary and benefits to those managing the company as well as pension contributions.
Tax reliefs and expenses
There are many tax reliefs and expenses that are only available to companies and not individuals. These include, but not limited to, loan interest deductions, allowable revenue, capital expenditures and management expenses.
Who are they suitable for?
A FIC is generally most suitable for those with substantial funds to invest and who are able to keep the funds within the company for a lengthy period, thereby giving the company and underlying investments time to grow.
To find out more about Family Investment Companies, please speak to Daniel Wilson or Nick Lloyd on 0345 070 6000. emwlaw.com
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