Over the last few years, a combination of legislative changes have prompted asset rich families to look for alternative tax efficient ownership structures. This blog is designed to provide an introduction to one such structure, the Family Investment Company.
What is a Family Investment Company (FIC)?
A FIC is a limited company typically created by parents with a specific investment, or range of investments in mind. The company's purpose is to benefit from the income that is derived from the asset and (hopefully) the capital appreciation, and to pass wealth down the generations in a tax efficient manner.
There are no practical restrictions on what assets the company may acquire, including residential property and FICs are increasingly commonly being used in place of or alongside planning which would have historically involved a trust.
The company would typically be created with a small amount of share capital split between the parents and the younger generation(s).
Income derived from the investments may be reinvested within the company, used to service any debt, or to pay out dividends.
The parents may provide the company with finance by way of loan or share capital, but it is also possible that external debt (e.g. a bank loan) may feature particularly where the assets invested in are property.
What are the tax advantages?
From an IHT perspective there may be significant benefits obtained. A gifting of shares down the generations could, with a suitable passage of time, pass value on with no associated tax charge. The spreading of asset values between a number of shareholders might also bring absolute tax savings to the family as a whole. For substantial gifts this may compare favourably to, for example, a family trust.
Profits earned by the company will be charged to corporation tax (currently at a rate of 19%), and with most dividend receipts being tax free in the company’s hands, this compares very favourably to higher rates of income tax which may be applicable where assets are held personally.
Company expenses incurred (professional fees and qualifying interest for example) will reduce the taxable profit, and, therefore, the corporation tax bill. Again this compares favourably to assets which are held personally.
Post tax profits can be sheltered within the company and distributed at a time that best suits the circumstances of the shareholders. This could involve funding children’s university costs or subsidising their early working life, or funding grandchildren’s schooling costs or extra curricular activities.
How about commercial considerations?
The company’s constitution (i.e. its Articles of Association) possibly in conjunction with a Shareholders’ Agreement can be used to stipulate, for instance, what categories of investment can be made or how profits should be applied. Other provisions may include restrictions on who can be a director and on the transfers of shares – this may be particularly relevant if an undesirable partner/spouse is a feature and you would not wish to see shares pass into their hands.
The company’s shares could be divided into different classes, facilitating differing levels of dividend as well as putting voting rights, rights over appointing directors and other such control related matters into the hands of whomever the founder deems appropriate.
Is it for me?
A Family Investment Company will not be suitable for everyone. Trusts remain an incredibly useful tool in family asset protection and wealth dissemination and other planning tools may more suitably meet your needs than an FIC.
Taking Inheritance Tax planning advice would be advisable if you have:
- Substantial assets (beyond your home) - do you exceed the inheritance tax free allowances?
- Family members or others you’re interested in financially supporting.
How UHY can help
- The first step is to perform a full fact find with you to establish your circumstances and your intentions.
- We can assist you with creating the company, writing its constitution, and dealing with all other set up formalities such as liaison with HMRC.
- If necessary, we can introduce you to lenders and intermediaries who will be able to provide you with the requisite finance to purchase an asset.
- We will provide you with a suite of company documents to use through your financial year such as templates for dividend vouchers, meeting minutes & resolutions.
- If you wish, we can handle your bookkeeping for you, or failing that recommend a suitable software package that will assist you in staying compliant.
- We can also assist with all year end compliance, preparing accounts and company tax returns as well as family members’ tax returns.
If you would like to have an initial meeting to discuss FICs in more detail, please contact me or your usual UHY adviser.
Alternatively fill out our contact form here and one of our experts will get back to you.
