In addition, increases in Inheritance Tax are making succession planning more difficult. Thus, higher taxes – the result of government’s drive to combat the UK’s huge deficit – are leading many high-net worth individuals to find more efficient means of structuring their tax investments. One such cost-effective, simple solution for those based in the UK may be the Family Investment Company.
A Family Investment Company (FIC) is simply a private investment company whose shareholders are family members. The Memorandum and Articles of Association of such a company are drafted to suit the family’s specific and unique needs – for example, defining how specific family members will benefit with regards to voting rights, income and/or capital. Family Investment Companies can be limited or unlimited.
What are the benefits of a Family Investment Company?
- Offers a flexible structure defined by the family members themselves through the Memorandum and Articles of Association
- Facilitates retention of control over family investments
- Offers asset protection
- Is tax efficient
- Can be used as a vehicle to accumulate wealth
- Facilitates estate planning.
A Family Investment Company is taxed according to corporation tax rates, which is considerably lower than personal income tax rates. Currently, corporations are taxed at 28% (decreasing to 24% from 1 April 2014) and income tax at 45%. What’s saved on tax can be reinvested to further wealth creation. Other tax benefits include:
- Tax on the income of dividends can be deferred until the funds are actually required
- Indexation relief on capital gains (an allowance which gives relief for the effects of inflation in computing gain)
- No corporation tax on dividends received from other UK companies and most offshore companies
- Loans to a Family Investment Company can be repaid without incurring further taxes
- Investment managers’ fees can be tax deductible.
Family Investment Companies and succession planning
What about Inheritance Tax (IHT), you ask? While trusts have traditionally been the vehicle of choice for passing down family wealth, currently the Family Investment Company offers some attractive benefits over the trust in this regard:
- On transferring cash to a Family Investment Company, there is no immediate Inheritance Tax payable (The Finance Act 2006 means that putting funds into a trust generally incurs an immediate 20% inheritance tax charge)
- Gifting Family Investment Company shares to other family members will not garner Inheritance Tax, providing that the donor survives seven years after gifting.
Remember, though, that (except in certain circumstances), inheritance tax will be payable if a donor holds shares in a Family Investment Company upon his or her death. The bigger the value of the shareholding, the more inheritance tax is payable (which, conversely, means that smaller holdings are discounted).
Are there any downsides to a Family Investment Company?
Unfortunately, there is no ultimate solution to corporate or personal taxes! The cons of a Family Investment Company include:
- Any capital gains achieved through a Family Investment Company is taxed at the current rate of Capital Gains Tax for individuals and trustees (28%) and not the rate for corporations (24%).
- Shareholders will pay tax on dividends which they receive (‘double-tax’)
- The transfer of assets to a Family Investment Company triggers capital gains tax, whilst the transfer or property will incur stamp duty and land tax charges (to circumvent this, then, set up your Family Investment Company with cash).
Have you had experience with a Family Investment Company? How did it work out for you and