A Family Investment Company (‘FIC’) is a company whose shares are held by family members. Those family members may also be employees or directors of the company. An FIC is an effective tool to facilitate wealth succession and family tax planning.
How does it work?
An FIC is created and family members will subscribe for shares (which can be at £1 par value). If a brand new company is established then there will be no tax consequences relating to the issue of new shares. Voting shares may be issued to parents and non-voting shares may be issued to second or third generations of family members.
Once the company is set up family members can make transfers into the company which can provide long term tax planning opportunities.
Cash, investments and property can be transferred and existing unincorporated businesses can move into an incorporated structure via the use of an FIC. Family members may also loan funds to an FIC.
Who can benefit?
By issuing shares to the next generation it is possible to provide the next generation with an entitlement to the assets in the FIC and allow the growth in value of these assets to be allocated to a specific class of shares (i.e. the children’s shares). This allows for the potential to consider capital growth in the company from a capital gains and inheritance tax planning perspective.
It is possible to consider the use of a trust structure for very minor beneficiaries in order to provide a level of protection and control. This would involve the trustees subscribing for shares in a trust established to benefit minor beneficiaries.
Gifting or transferring shares to second generations would constitute a disposal for capital gains and inheritance tax purposes however the actual value of the shares at incorporation is likely to be low and the tax consequences would therefore be likely to be minimal at that stage.
Long term inheritance tax planning can be put into place relating to different family members and classes of shares. It is possible to allocate different income and capital growth rights effectively to ensure that this growth remains outside of the original founding shareholder’s estates.
Tax planning and savings…
Corporate tax will be due on the income producing assets held within the FIC and this is currently at the rate of 19%. This is lower than the rates of tax that an individual taxpayer is liable for on the profits arising from an unincorporated business.
If investments are sold within an FIC structure the proceeds from the sale will also be subject to corporation tax which is again lower than the rates of tax an individual would suffer at 20%, 28% or 40% upon the sale of a chargeable asset held in an individual’s personal name.
An unincorporated business or partnership which is profit making will be taxable on the individual owners of the business at the rates of 20, 40 or 45% dependant on the level of profit. An FIC will allow the family members to decide which profits to retain in the business and which profits to draw out of the business and by what means. This means that funds can be extracted from a business in the most tax efficient way.
It is possible to extract profits of an FIC by way of either tax-free repayment of a loan, salary and/or benefits. It is important to remember that with an FIC structure there are potentially two tax charges, corporation tax in the first instance and taxation at personal level when shareholders extract profits.
In addition, dividends can be paid to each shareholder to ensure that the tax allowances of minor children are utilised to extract profit from the company. Dividends must be paid from post-tax profits, meaning that any profit net of corporation tax is available to pay dividends.
Dividends have a £2,000 tax free allowance for each individual from 6 April 2018 and thereafter the effective rate of tax is up to 38.1% at higher tax rates and 7.5% at lower rates. Dividends can also be paid without the requirement for any national insurance contributions on the sum received.
Would you like help and advice on this or any other tax issue?
We have many years of experience in advising owner managed businesses and assisting with long term wealth planning. Many of our clients have considered FIC as a viable route and have worked with us to maximise tax savings where relevant.
Contact our office today to make an appointment to speak with one of our specialists by telephoning 01932 564098 or email us using our ‘Contact Us’ page.
This article was published in June 2018 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.