Posted by RoosterCreativeMarketing on 02 Aug 2021

Family Investment Companies Obstacles and Benefits

Family Investment Companies are a flexible structure for inheritance tax planning

Trusts have traditionally been used for inheritance tax (IHT) planning as IHT on death can be avoided, but often at the expense of a 10 yearly IHT charge and higher rates of tax on income and capital gains. Family Investment Companies (FICS) can similarly mitigate IHT on death, but without the 10 yearly charge and while providing access to the lower corporate rate of tax on income and gains.

Obstacles to Effective IHT Planning

IHT planning is complicated by several factors:

•  IHT planning relies on moving ownership of assets down a generation, which will usually trigger capital gains tax, especially for long-term investment assets such as properties.
• For gifts to be effective for IHT purposes, the person making the gift can no longer benefit from the asset – you can no longer receive income generated by an investment you pass to your children. This makes it hard to balance the practical need to have access to cash against the IHT drive to move assets down a generation.
• Making gifts that are effective for IHT often requires the person making that gift to surrender control of that asset, which can be a difficult step to take.

Benefits of a FIC

• A FIC allows the older generation to pass value to their children, reducing exposure to IHT, while also retaining control of the family wealth.
• A FIC provides a separate environment that can hold assets as long-term investments, allowing wealth to be passed down generations without changing ownership of investments, meaning capital gains tax is not triggered.
• The older generation can still access cash in the form of dividends or loan repayments from the FIC, meaning IHT planning does not need to reduce your access to cash.
• A FIC pays tax at Corporation Tax rates of 19% (possibly increasing to 25% in 2023), rather than income tax rates of up to 45%. In addition, a FIC is not caught by the restriction for tax relief on mortgage interest that is proving burdensome to property investors, and often does not pay tax at all on dividend income. This makes a FIC a good vehicle for making investments regardless of the IHT savings.

Setting up a FIC

There are two aspects to establishing a FIC:

• Setting up the company with an appropriately designed and wide shareholding, that provides for growth to be passed to younger shareholders.
• Funding the company, usually via a transfer of assets into the company by the older generation either as a capital contribution or as a loan.

The first of these requires careful consideration of the rights that each shareholder will have, while the second involves navigating the tax consequences of transferring assets to a company. This process can trigger capital gains tax, which can be a necessary cost of avoiding the more significant inheritance tax consequences of not planning for the future, but this does mean that a FIC should ideally be established at a time that investments are being considered rather than when capital assets have been held by the family for some time and there are no plans to dispose of those assets. FICS are especially attractive when the older generation have significant cash reserves, or a very fluid investment portfolio that can be moved without a large CGT cost.

If you would like any advice regarding family investment companies or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com.

 

See also…

Inheritance Tax: Future Planning

Family Investment Companies

Company Formation

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