Family investment companies are a useful tool for tax efficient family wealth planning.

If you hold assets in your own name, these assets may be subject to Inheritance Tax (IHT) on death as well as profits earned during your lifetime being charged to income tax at rates of up to 45% if you are an additional rate tax payer. A family investment company (FIC) could be used for tax efficient investment purposes.

In this blog I’ll cover some of the advantages and disadvantages of family investment companies, how to set one up and the potential areas of tax efficiency they offer.

What is a family investment company?

Simply put, a family investment company (FIC) is a company that is used for investment purposes. It is a normal company that’s incorporated and limited by shares, but it invests rather than trades. Examples of the types of investments a FIC can include are cash, equity portfolios or property.

A Family Investment company is set up by the founders, who then transfer cash or assets, usually by way of a loan into the FIC or by using incorporation reliefs.

FICs can create significant tax savings as profits that occur in a Family Investment Company are taxed at corporation tax rates rather than taxed as personal income or capital gains.

Family Investment Companies can also provide Inheritance Tax benefits, making it an alternative to more traditional trust arrangements used in the past.

Who should consider using a Family Investment Company?

Family investment companies are popular with business owners, entrepreneurs and directors that are higher or additional rate taxpayers with portfolios of property and investments. They are often used for long term multi-generational tax planning purposes.

Advantages of a Family Investment Company

The benefits of family investment companies are as follows:

• Profits from the investments are subject to Corporation Tax rather than higher rate income tax.
• Preservation of wealth for future generations.
• You can keep control over the assets in the company by being named as a director and preferential shareholder. The gives flexibility over how the income and capital rights are structured.
• Full tax relief for interest paid on residential mortgages.

Disadvantages of Family Investment Companies

·         If putting property, rather than cash into an FIC, this may trigger a capital gains tax charge and a Stamp Duty Land Tax charge.

·         Set up costs and ongoing administration costs for corporation tax returns and accounts for the FIC can make it a more expensive option. Speak to Barnes Roffe to get an idea of costs before making a decision.

·         A FIC may not be the correct structure if all the profits are extracted.

How is an FIC set up?

Setting up a family investment company is normally done with founding shareholders transferring assets into the company. You need to be aware if transferring assets, whether this has tax consequences for Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT).

The founding shareholders normally maintain control over the company and therefore control the payment of dividends and return of capital. This can be done by separating the rights relating to shares within the Articles of Association and possibly a shareholders agreement.

When the FIC is created, family members and family trusts are brought in as shareholders and different classes of shares can be issued.

Tax Advantages of a Family Investment Company

Corporation Tax

Profits arising within in the FIC are chargeable to corporation tax. Corporation tax is currently between 19% and 25% in 2023/24. The 25% rate applies to companies with annual profits exceeding £250,000. A ‘small profits rate’ at 19% applies to companies with annual profits below £50,000. Where a company’s profits fall between the upper and lower limits, marginal relief provisions will apply to bridge the gap between the two rates.

Where the FIC holds an equity portfolio there may be no tax at all as dividend payments are often tax free from company to company. This can increase the return on the investment significantly. FICs can benefit individuals if used to house their residential property portfolios as the rental profits in the company are taxed at corporate rates and companies can deduct any loan interest from the rental income which is now restricted for personal investors to basic rate.

Capital Gains Tax (CGT)

Any gains on assets sold within the company would be charged at corporation tax rates rather than personal Capital Gains Tax (CGT) rates.

If CGT is likely to be triggered on the transfer of assets into the FIC, then it may be that an FIC is not suitable. Barnes Roffe can advise you the best course of action.

Income Tax and Dividend Tax

The company wrapper of a FIC shelters the investments from income tax until the funds are extracted from the company. When profits are extracted, the shareholders will be liable to income tax on any amounts received (subject to thresholds). Payments are usually made by way of dividend and will attract the current rates of dividend tax.

It is often not beneficial to pay dividend income to the founder shareholders as their income levels can be high. This is because the combined tax rate of the company and the income tax would be higher than if the asset were held directly.

Dividends paid to minors would usually be taxed on the parents. However, for children over the age of 18, payment of a dividend up to the basic rate band can be a very efficient way of extracting funds. This can prove useful to provide income during further education/university periods.

You will gain most tax benefit from a FIC when the capital and income is retained within the company for long periods and passes wealth onto the next generation.

Inheritance Tax

Inheritance tax benefits are often one of the key motivations for setting up a FIC. The reason for this is that often most of the increase in value in the company is attributed to shares held by the next generation.

Family Investment Companies and HMRC

The HMRC unit originally set up to investigate the use of FICs was merged into another unit after completing a lengthy review of FIC usage. HMRC concluded that Family Investment Companies were being used as a planning strategy for generational wealth transfer and the mitigation of Inheritance Tax. However, HMRC found no evidence to suggest that there is a correlation between those who establish Family Investment Company Structures and tax non-compliance behaviour. This indicates that FICs remain as a useful tax efficient structure and one that is unlikely to be challenged by HMRC in the short term.

Conclusion

A Family Investment Company (FIC) can be used as an alternative to a family trust. It can enable parents or grandparents to retain control over assets whilst accumulating and passing on wealth in a tax efficient manner. It allows individuals to pass wealth to future generations and helps with multi-generational succession planning.

How Barnes Roffe Can Help

We have tax experts that can help you to plan and decide if an FIC is a suitable structure for you. As professional advisers we look at your individual circumstances and family position and can advise whether an FIC or trust may be suitable.

If you have a trading company with large cash reserves, you inherit significant money, have numerous assets or you have built or are looking to build a property portfolio, then a FIC may be a tax efficient and flexible way to manage your estate and wealth.

However, there is no one size fits all to your estate and tax planning so we can help to create a bespoke wealth planning and investment strategy for you and your family members to ensure everything is set up and administered in a compliant and tax efficient manner.

Contact us today for help and more information on FICs.