When the Finance Act 2006 was introduced, it brought a number of substantial changes to the tax rules for UK trusts, including, for example:
- An immediate charge to inheritance tax (IHT) at 20% for transfers made into a trust in excess of the donor’s nil rate band (currently £325,000);
- Every 10 years, a further IHT charge (capped at a rate of 6%); and
- An additional charge to IHT if assets leave the trust (also capped at 6%).
The above charges have meant that affluent individuals wishing to pass their wealth down to their family have had to consider alternative structures, which may be more tax efficient.
One such vehicle what has become more common in recent years is the family investment company (FIC) because of the more beneficial corporation tax rates (currently 20% which are set to fall to 19% from April 2017 and 18% from April 2020) which a company pays compared with the income tax rates (usually 45%) payable by a trust where the income is accumulated.
What is an FIC?
An FIC is a UK resident company whose shareholders are family members, which will usually include spouses, children and grandchildren.
The FIC can be set up either as a limited or an unlimited company. If the FIC is unlimited it means that its shareholders will have unlimited liability for the losses and liabilities of the FIC. However, as the business of FICs is mainly investment and not trading, such losses and liabilities can be minimised. The upside of being an unlimited company is that (a) there are fewer restrictions on its maintenance of capital and more importantly (b) it is not required to file annual accounts with Companies House, thereby maintaining the privacy of the family’s wealth held in the FIC.
The structure will be subject to financial and taxation advice received by the founder of the FIC. However, usually, the founder of the FIC will either gift or loan assets to the FIC and the family members including the founder will receive shares in the FIC. Different classes of share can be issued to create flexibility as to (a) distribution of income and assets and (b) retention of control of the FIC by the founder. It is therefore vital that the FIC has a detailed shareholders agreement and/or articles of association to provide for this flexibility and control, as well as to ensure shareholders are only family members.
The assets introduced will usually be non-business related assets and can include cash, property, equity securities (i.e. shares), artwork and even classic cars.
There are a number of benefits that an FIC can provide over other tax planning vehicles, including:
- Cash transferred into the FIC would be transferred tax-free;
- There will be no immediate charge to IHT in relation to any gift made into the FIC provided that the person making the gift survives 7 years;
- The founder retains control of the FIC allowing the founder to determine how the FIC gets the best return for any investments it makes, as well as who is entitled to receive any distribution from the FIC;
- The FIC will only pay corporation tax at the rate of 20% (currently) on any profits it makes. However, any income received from another company by way of dividend (due to investments held by the FIC in that company) can be tax-free;
- Shareholders of the FIC will only pay tax to the extent that the FIC makes any distribution to them, however if profits are retained in the FIC, then no further tax is payable.
How can Myerson help?
We can help you to put in place the most suitable tax efficient structures to help you with tax planning and transfer of assets. As part of this tax planning, we can identify whether or not an FIC would be a suitable vehicle for you. If so, we can introduce you to specialist financial and tax advisors which can assist you in setting up the most appropriate structure for you. We can then set up the FIC and prepare the proper documentation (including a shareholders agreement and/or articles of association) to ensure that the FIC works for you.
How We Can Help
A member of our specialist team will be happy to help.
To discuss Family Investment Companies issues, please either use the contact form on the right, email us at firstname.lastname@example.org or call us today on +44(0)161 941 4000 to speak to a member of our team.