Could a Family Investment Company help your tax position?

For many years trusts have been considered the standard way to pass family wealth on to future generations. The last few years however have seen tax changes which mean that Family Investment Companies (FICs) may be the more tax-efficient option…

Significant changes were introduced in the Finance Act 2006 affecting the UK's tax regime for trusts. Now we see that nearly all new lifetime trusts are dealt with under the relevant property regime, which means:

• An immediate charge to inheritance tax (IHT) at the lifetime rate of 20% for gifts made into trust in excess of the available nil rate band(NRB) - currently £325,000;
• A 10-yearly IHT charge (capped at a maximum rate of 6% over and above the available NRB);
• A further charge to IHT if assets 'exit' the trust (also capped as above).

These changes mean that those wishing to pass down substantial wealth in the protected manner that trusts offer need to look to different solutions, which may be more tax-efficient. All of this means that FICs have become increasingly topical in recent years, primarily owing to the increasingly competitive rates of corporation tax available in the UK (20% from 1 April 2015) that we have enjoyed under the current Government.

So, what is a FIC?

In its simplest sense a FIC is a UK-resident private limited company whose shareholders are family members. Such a vehicle can be extremely tax-efficient where an individual transfers significant sums of cash, property or investments into a company. These assets can then be utilised to generate income for the family.

Three benefits of a FIC

1. Provided that an individual has available cash to transfer into a company, the transfer into the company would be tax-free.
2. There would be no immediate charge to IHT, as a gift of shares from the donor to another member of the family is deemed to be a potentially exempt transfer (PET). Provided the donor survives for seven years following the gift there will be no further IHT implications. Furthermore, the donor could still retain some control of the company providing the articles of association are appropriately drafted.
3. The FIC would only pay tax at a rate of 20% on the profits that it generates. Shareholders then only pay tax to the extent the company distributes dividends. If the profits are retained within the company therefore, no further tax would be payable.

Three disadvantages of a FIC

1. If non-cash assets are transferred into the company, the donor may be incur a capital gains tax (CGT) charge at a rate of 18% or 28% based on the market value of assets that are transferred into the company at the date of transfer.
2. It is possible for there to be an element of double taxation in using the FIC structure. The profits are first subject to corporation tax at a rate of 20% and then are subject to income tax when they are subsequently distributed to the shareholders, albeit accessing capital through a purchase of own shares can be highly tax-efficient in some circumstances.
3. As the company has to comply with company filing regulations there are costs to consider, but this is equally true when setting up and running a trust.

The attractive corporation tax rates mean that a FIC is something that should be seriously considered as an alternative to a trust. It will still allow the donor to retain some control over their investments while avoiding an immediate charge to IHT. As with all planning of this kind though, proper care does need to be taken and professional advice should always be sought. It is certainly not something one should enter light-heartedly.

Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.