Family investment companies (FICs) have become a hot topic for discussion with more and more families considering utilising them to mitigate tax and put an effective succession plan in place.
FICs are privately owned companies set up with the primary purpose of managing and safeguarding wealth for the next generation. They are usually set up to hold investments and assets and don’t take part in any trading activities.
A FIC will issue alphabet shares, with each class having different economic and voting rights. This allows the founder(s) to retain control, yet younger generations will benefit from the asset growth. Dividend distribution can be controlled and structured to provide a tax-efficient solution dependent on the recipient’s other income.
FICs are funded by a series of gifts and interest-free loans, transferred in exchange for various shares. Initially, the founder(s) owns all the shares before, by way of gifts, passing them on to the younger generation. It is important to consider that this needs to be done in a timely manner to ensure there is no substantial increase in asset value that could give rise to tax liabilities.
For the founder, gifts into the FIC will be classed as a potentially exempt transfer (PET) and the standard 7-year survival period would be applicable — after which the assets are no longer included in their estate and avoid an IHT charge.
As FICs are ordinary companies, they don’t benefit from any IHT reliefs. As such the value of the company’s shares will be subject to IHT in the estates of the younger generations. It is essential to continue with intergeneration planning and handing down the shares to younger generations. It should be noted that every event of gifting shares will count as a ‘disposal’ and proactive financial planning is essential to get the most gain out of this strategy.
Corporation tax is currently charged at two levels, 19% and 25%. As FICs meet the definition of ‘close investment holding companies’ rules, on small profits and the reduced tax rate of 19% don’t apply. Therefore, FICs pay corporation tax at the increased rate of 25%.
Companies are able to claim corporation tax relief for bank charges and interest incurred on loans taken for the benefit of the business. This includes any charges incurred for facilitating and setting up investments or paying for professional services.
As some assets might carry a large capital gain this is a big consideration when setting up a FIC. Transferring / gifting these assets into a FIC counts as a ‘disposal’ for CGT purposes and could lead to large CGT bills. Seeking professional guidance on the most tax efficient solution for getting assets into a FIC can be key. Once assets are within the FIC any disposals would be subject to corporation tax and not CGT.
Dividends received from a FIC are exempt from tax. This can be utilised to substantially increase tax efficiency, by setting up dividend-paying investments to reduce the overall tax bill.
Dividends to shareholders are subject to tax based on their individual earnings, after utilising their tax-free dividend allowance of £1,000 per person per tax year. It is important to note that this allowance is decreased to £500 on the 5th of April 2025.
Individuals with any form of rental property will likely have an IHT liability. If their objective is to hand over the property/properties for the benefit of their children, direct gifting will be classed as a PET, meaning control will be ceded, as well as the loss of rental income will need to be accepted. This would also trigger a ‘disposal’ that could result in a CGT charge.
There is a potential way to avoid triggering a ‘disposal’ to incorporate, so that the gain is held over that would otherwise result in an immediate tax charge, through claiming incorporation relief. However, a number of specific conditions need to be satisfied, whilst Stamp Duty Land Tax (SDLT) may also be payable unless the existing entity has been trading for several years legitimately as a partnership.
However, even if successful, when shares in the FIC are given away, this would bring the deferred gains in to charge.
As with everything there are pros and cons to setting up a FIC. Good active financial planning can mitigate, or even remove, many of the negatives. For more information, please contact a professional at Quilter Cheviot.
Quilter Cheviot can provide planning and investment advice to the directors of an existing FIC. However, due to the specialist tax and legal considerations, we cannot advise on or instruct the set up or structure of a FIC.
This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction.
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