Family Investment Company
Chris Broome – Chartered Financial Planner
Trusts have been the traditional way to pass down family wealth to future generations. Tax changes over the past few years mean that Family Investment Companies (FICs) may offer a more efficient option.
The Finance Act 2006 introduced significant changes to the UK’s tax regime for family trusts. Most new family trusts now enter into the “Relevant Property Regime” which result in:
- An immediate charge to IHT at 20% for transfers made in excess of a donor’s available nil rate band (currently £325,000).
- Ten year IHT anniversary charges (capped at a rate of 6%).
- Further charge to IHT if assets “exit” the trust, also capped as above.
With these limitations, individuals wishing to pass down substantial wealth need to consider alternative vehicles, which may be more efficient. This is particularly topical due to the increasingly competitive rates of corporation tax available in the UK (currently 19%) and whether it is possible to use a company as a store for family wealth, and a vehicle to pass it down the bloodline.
What is a Family Investment Company?
A Family Investment Company (FIC) is a private limited company, whose shareholders are different generations of family members. This vehicle can be extremely efficient where an individual transfers significant sums of cash or other assets into a company.
The cash or assets could be invested to generate income for the family.
The Directors can be those individuals who initially provide capital to the FIC in order to retain control.
The Benefits of a Family Investment Company
- Assuming that an individual has available cash to transfer into a company, the transfer into the company will not be subject to tax.
- There will be no immediate charge to IHT on the gift of shares from the donor to another individual, as this is deemed to be a potential exempt transfer (PET). There will be no further IHT implications on the donor if he/she survives for seven years following the date of the gift.
- The donor can still retain some element of control in the company providing the Articles of Association are carefully drafted.
- The company will only pay tax at the rate of 19% on the profits that it generates.
- Shareholders only pay tax to the extent the company distributes income. If the profits are retained within the company no further corporation tax will be payable and the company acts as an efficient store of profits for further investment.
- Asset freezer for estate planning purposes by giving away shares with capital appreciation.
A Family Investment Company is something that could be seriously considered as an alternative to a trust for asset values exceeding the nil rate band. A FIC still allows the donor to retain control over their investments whilst avoiding an immediate charge to IHT.
Care does need to be taken, however, if assets other than cash are to be transferred into an FIC, but please get in touch if you have any specific situations to discuss and we can advise accordingly.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.