A Family Investment Company (“FIC”) is a useful vehicle for both passing wealth to the next generation and as an investment vehicle in its own right. It also has potential inheritance tax (“IHT”), income tax and capital gains tax benefits. Now is a particularly good time to be establishing a FIC, given current depleted asset values.
What is a Family Investment Company and why might I want one?
A FIC is a company that can be used to pass wealth down the generations while maintaining control over it.
A classic use of a FIC is where an older generation such as parents wants to make a generous gift to a younger generation such as their children (which could be adults or minors) but wants to maintain control over the investment strategy of that gift. It is very appealing to parents, to have in particular, the ability to phase a gift to children and control when and how much of that gift the children should receive. Historically, a trust may have been used for this purpose, but changes to the trust tax rules made trust less attractive. In most cases, gifts to a trust in excess of £325,000 incur a lifetime IHT charge.
A FIC is structured such that all or most of the voting control sits with the parents but the value and future growth in value of its shares accrues to the children. Provided the parents survive seven years from setting up the FIC, most of the value contained within the FIC does not form part of their estate for IHT purposes. On a transfer of £1 million, something in the region of £400,000 in IHT can be saved, while also retaining control over the £1 million.
Are there other advantages?
The other tax advantage of a FIC is that investment returns are subject to the lower levels of tax that currently apply to companies. The headline rate of tax for income and gains in a company is 19% compared to the highest personal tax rates of 45% (38.1% for dividends) and 28%, respectively. Perhaps most significantly, most dividend income received by companies is not taxable at all unless and until it is distributed to shareholders. Consequently, a £10,000 dividend received by a company can be re-invested in its entirety whereas the same dividend received by an individual could be as little as £6,190 after income tax.
The compounding effect and financial benefits of reinvesting gross income (£10,000) rather than net income (£6,190) can be substantial in the longer term. However, it may also mean that there is a greater amount of income to pay out to the children if that is desired if at least some of the dividends received are reinvested.
It is for this reason, that companies can and are used as investment vehicles in their own right, irrespective of any objective to pass wealth to the next generation.
Additionally, it is worth mentioning that management and administration fees, such as investment management fees, tax reporting and so on, are generally deductible against income for corporation tax purposes. Such expenses are not, however, relievable for individuals.
Is now a good time?
Yes! From a tax point of view, there are two good reasons and these are linked to two specific taxes:
Capital Gains Tax (CGT)If you want to fund a FIC with non-cash assets, then on a transfer of assets standing at a profit, this can trigger a capital gains tax charge, subject to the availability of the annual exemption.
In a depressed market, however, this presents an opportunity to transfer non-cash assets such as stocks and shares which have previously stood at a gain, into a new corporate tax efficient wrapper such as a FIC, without realising prohibitive capital gains tax charges in the process.
It might also present the opportunity to utilise previously realised capital losses to offset against gains realised on a transfer of other assets standing at a gain to a FIC.
Inheritance TaxIf an individual dies within seven years of making a gift, the value of that gift is in their estate for IHT purposes. The value that is brought into account is the value at the date of gift, not at the date of death. Consequently, gifts during a time of lower values give less exposure to IHT.
Any growth in value from the date of gift is also removed from the donor’s estate, provided they cannot personally benefit from it.
A FIC is a company with a specific purpose. It can be used to meet multiple wealth planning objectives and can be structured accordingly.
It does, however, generally have different “constitutions” to, for example, a standard trading company and different aspects that need to be considered. It does, therefore, require specialist input when they are established. Please contact me or your regular Smith & Williamson contact if you wish to discuss further.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.