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In recent years following changes to the rules regarding Trusts in 2006, Family Investment companies (FIC) have emerged as a popular option for wealth protection and the succession of family assets between generations. Its flexible structure and tax-saving benefits may provide great benefits for preserving the value of properties, equities or other investments within a family's portfolio.
In this guide, we'll explore the advantages of setting up a Family Investment Company and look at some of the caveats you should be aware of.
In most cases, it's the older generation who will set up the company as a limited entity and transfer funds into the company, normally as an interest-free loan.
Once formed, the FIC founder or founders (typically parents or grandparents) will be appointed as directors and can be issued with Ordinary Class A Shares, which include voting rights over the appointments of other company directors, the company's investment strategy and the issuing of dividends.
Different classes of Ordinary Shares can be assigned to each shareholder. This will enable greater flexibility in how funds can be withdrawn from the company, tax-efficiently.
Only children and other direct descendants over the age of 18 should be considered when allotting shares in the company. Otherwise, their income received will be deemed to their parent and taxed accordingly.
These documents will specify the amount and type of shares each FIC shareholder will receive. More specifically, the documents could also define the conditions and restrictions of issuing and transferring shares.
These agreements will normally require the support of a legal specialist and will add some additional costs to the initial company set-up.
Any income generated by the FIC could be either reinvested in the company to finance the purchase of additional assets or utilised to pay back the founders' loan. Any increase in the capital value of the assets (such as property, art collection or investment in other companies) will increase the value of the company.
Income received as an individual could potentially be taxed up to 45%. Whereas through a limited company vehicle the profits of the company will be taxed at 19%, potentially rising to 25% from 01/03/2023.
The allocation of different share classes means that the FIC will have greater flexibility in how it returns funds to its shareholders. This will allow for better tax planning capabilities for the different shareholders in the business.
An individual disposing of an asset such as an investment property would have their first £12,300 of taxable gain exempt and any excess taxed at 18%/28% depending on their personal tax position. They would also be required to report their capital gain to HMRC within 60 days.
Through a company the chargeable gain arising on disposal, the difference between its initial cost and sale proceeds is subject to Corporation Tax at 19%, potentially rising to 25% from 01/03/2023.
Investment properties held in a limited company are identified as an investment company in their nature and not that of a trading company. Therefore when it comes to inheritance tax as part of an individual's estate they are unlikely to qualify for Business Property Relief (BPR). This means they could potentially be liable to tax at 40% on the excess of any £nil rate band thresholds.
However, by being part of a limited company the impact of this potential tax burden can be diluted by having additional shareholders in the company. With a reduced shareholding percentage in the company, the amount to be included in the estate is also reduced.
A family investment company provides a tax-efficient platform to help manage returns for its shareholders. However, as with any limited company entity, it requires careful attention and planning in order to extrapolate the maximum benefit from it.
In addition to this everyone’s circumstances are unique and there is no such thing as a one size fits all approach. We would always recommend speaking to a dedicated accountant that can consider your individual situation and can then tailor their advice accordingly.
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