Family Investment Companies
With the rate of corporation tax in the UK set to be at a low of 17% by 2020, Family Investment Companies are becoming more attractive than ever as an investment ‘wrapper’.
What is a Family Investment Company?
A Family Investment Company (FIC) is a UK-resident company whose shareholders are family members. In simple terms, it is a company that invests rather than trades. Investments are typically equity portfolios or, in an increasing number of cases, property.
An FIC is set up by a founding member. As the founder, you maintain control over investments and payment of dividends, allowing you to determine how to get the best return on your investments.
Structure & benefits of Family Investment Companies
The FIC is created to benefit the family so shareholders are generally parents and/or children. By holding investment portfolios in a corporate structure, they are taxed at the current corporation tax rate of 20% (set to decrease to 17% by 2020). Income and capital gains on investments held in a personal name can be subject to tax rates as high as 45%.
An FIC protects your investment from income tax until the funds are extracted from the company. This type of structure is most effective when the income and capital can be retained in the company for long periods, or as a vessel to pass on wealth to the next generation.
When profits are extracted, the shareholders are liable for income tax at the current rates on any amounts received.
For younger family members, payment of dividends up to the basic rate of tax can be a good way to extract funds to help with things such as university fees. Dividends for children under the age of 18 are taxed on the parents.
Capital Gains Tax (CGT)
When assets within the company are sold, they are charged at corporation tax rates, rather than CGT. There is an additional benefit to holding an asset in an FIC as companies are able to claim indexation relief which is no longer available to individuals. Indexation relief eliminates the effects of inflation and can reduce the actual gain that is chargeable to tax – although as announced in the 2017 Autumn Budget this valuable relief will be frozen with effect from 1st January 2018.
On the sale or liquidation of the company, the shareholder would be charged CGT on the value of their shares, less any original cost. As shares are likely to be subscribed for at a nominal (par) value, CGT will be charged at 20% on the whole increase in value.
Inheritance Tax (IHT)
An FIC provides an ideal vehicle for inheritance tax planning. There is no immediate charge to IHT in relation to any gift made into an FIC, or on any shares transferred to other shareholders, providing the person making the gift survives for seven years following the gift.
Long term inheritance tax savings can also be made as any increase in the value of the shares gifted is outside the founder’s estate.
The right option for you?
Although a FIC may seem like an attractive option, it is not always right for everyone. It may not be appropriate if you are looking for a return of funds in the short or medium term. As part of your personal tax planning we can identify the tax efficient opportunities that are best suited to your individual circumstances.
To discuss your tax planning and more information on a Family Investment Company please contact Paula Jeffs.