A Family Investment Company (FIC) is a private company which is often used to move wealth to the next generation(s) without suffering Inheritance Tax (IHT), the FIC’s shareholders are family members. It can be used as an alternative to a family trust and acts to facilitate future succession planning.
It is likely to appeal to an older generation who want to make substantial gift(s) to their children but wish to retain control over the investment strategy and have access to the capital and income of the FIC.
What tax advantages will a FIC offer me?
A FIC is usually structured whereby the voting control sits with the parents, but the value and future growth of its shares passes to the children. Provided the founders survive seven years from setting up the FIC, the transferred value escapes their estate for IHT purposes (i.e., on a transfer of £2 million, IHT of approximately £800,000, could potentially be saved).
A parent could make gifts direct to their child; however, a young person may not have the financial maturity to manage what could be a substantial sum of money!
Another tax advantage of a FIC is that its income and chargeable gains are subject to the lower corporate tax rate of 25% (19% where the company profit is <£50,000), versus the personal additional tax rates of:
- Income – 45%
- Dividends – 39.35%
- CGT – 28%
Companies do not usually pay tax on their dividend income, whereas an individual could pay tax of up to 39.35%. The FIC reinvesting its gross income (versus an individual reinvesting the net income) will provide financial gains in the long term which will benefit the children.
Management and business expenses are usually deductible for corporation tax purposes, whereas they’re not for individuals.
Rental profits in a FIC are taxed at preferential corporate rates without a restriction for mortgage interest paid (provided the net interest charge is less than the corporate interest restriction amount of £2,000,000), whereas for 40% and 45% rate taxpayers personal property investors loan interest is restricted to 20%.
What’s the catch?
There are a few points to consider before setting up a FIC, please see the points below:
- For a FIC to achieve its purpose, it will require sufficient capital to meet its running costs.
- A transfer of property into the FIC is likely to trigger both CGT and SDLT dry tax charges which will need to be funded by the founder.
- Distributions from the FIC will be taxable in the hands of its shareholders.
- As with any company, there will be annual compliance costs of running a FIC, though generally less than a trust.
How do I set it up?
The parents could:
- Subscribe for voting shares, which give them control of the FIC at both shareholder and board level.
- Subscribe for a class (or classes) of non-voting shares, which are gifted to their children. These shares will have little value at the time they are gifted but will grow in value as the FIC’s underlying assets appreciate. The gift will not be subject to IHT, provided the donors survive seven years from making the gift. The non-voting shares could pay dividends in future.
- Transfer funds to the FIC, either by way of interest-free loans or by subscribing for preference shares. This is not a transfer of value for IHT purposes, and the funds can be extracted from the company later on tax-free.
- Transfer funds into a discretionary trust for the benefit of their children without triggering an IHT charge (i.e., to the extent that the IHT nil rate bands and annual exemptions are available – £662,000 maximum for a couple). The settlor(s) should be irrevocably excluded from benefiting from this trust. The trustees would subscribe for non-voting shares in the FIC at market value (nominal value if the company is newly created).
Given that the founders may be of an older generation, it is sensible for at least two directors to be appointed to manage the FIC.
What next?
If you are thinking about passing wealth to the next generation and need help choosing the best structure, please contact the Gravita Tax Team, who will be happy to help you.
