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Family Investment Companies

14th July 2017

Family Investment Companies have seen something of a resurgence recently, and though not the “panacea” that they are sometimes said to be, they can be very effective in the right circumstances.  We have set out below some of the main considerations with regard to their use.

 

  • An FIC is essentially a private investment company. The directors and shareholders of the Company will be individual family members or trusts. An FIC is a very flexible structure allowing families to define how specific family members benefit through varying rights attaching to shares or the number of shares in issue.
  • The shares can therefore be structured to allow the passing of ownership of underlying assets to the next generation without the older family members losing control too soon.
  • An FIC can provide a straightforward, tax efficient solution to family succession issues and offer flexibility to retain control over family issues. The solution will be most relevant to individuals with substantial investment assets and income, to be preserved for the next generation and protected from high personal tax rates. The tax perspective of a FIC is important but it is also essential to consider the protection, commercial and emotional aspects.

Creation

  • CGT – The main downside of transferring assets standing at a gain into a FIC is that it is a CGT disposal, crystallising gains at 20/28%.
  • Recommended to use cash, or assets with minimal gains (e.g. recently inherited portfolios), or offset with capital losses (connected persons rules).
  • Gift v Loan - If an individual places the money in the Company, this will often be by way of a loan. These loans are often interest free and repayable on demand. If funds are required repayments of loan capital can be made without incurring further tax. For example shares may be sold to the company but the proceeds left on loan, perhaps due to a newly formed FIC not having available funds. When dividend income begins to flow to the company these could be used to fund loan repayments, giving the ‘founder’ access to the funds in a tax free form.
  • As with most companies, tax will arise where profits are extracted either in the form of income tax on distributions or capital gains tax on share disposals. From April 2016 the dividend regime has changed and a new tax free dividend allowance of £5,000 has been introduced. Any dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
  • Care must be taken to ensure a Stamp Duty Land Tax liability does not arise on the transfer to a FIC of commercial or residential property.
  • IHT - The value of the shares in the FIC will be subject to IHT on the death of the shareholder, to the extent of the value of their shareholding. The benefit lies in the gift of shares to the next generations.

Taxation

  • The UK has one of the lowest corporation tax rates of any of the Group 7 (G7) countries, currently set at 19% for 2017/8 this is set to reduce down to 17% from April 2020.
  • FICs are taxed the same as other companies and pay corporation tax on their annual income and gains. Unlike individuals, FICs still benefit from indexation on capital gains, removing an allowance for inflation from the charge to tax.
  • Crucially, there is no charge to corporation tax if the FIC is in receipt of dividend income from UK companies and the FIC therefore offers potential protection from high personal and trust tax rates of up to 38.1% from 6 April 2016.
  • FICs are often most efficient as long term investment vehicles when profits are retained within the Company.

Summary – Advantages

  • Assuming that an individual has available cash to transfer into a company, the transfer into the company would be tax-free.
  • There would be no immediate charge to IHT on the gift of shares from the donor (parent) to another individual (children/grandchildren) as this is deemed to be a potentially exempt transfer (PET). There will be no further IHT implications on the donor if they survive for seven years following the date of gift (but watch for a CGT charge on the gift of the shares themselves).
  • The donor can still retain some element of control in the company providing the articles of association are carefully drafted.
  • The company would only pay tax at a rate of 20% on the profits that it generates (0% on dividend income).
  • Shareholders only pay tax to the extent the company distributes income. If the profits are retained within the company (or used to repay an initial loan) therefore, no further tax would be payable.

Disadvantages

  • If non-cash assets are transferred into the company, the donor may be incur a capital gains tax (CGT) charge at a rate of 28% based on the market value of assets that are transferred into the company at the date of transfer.
  • Trust structures continue to be tax-efficient if you can transfer assets in without incurring an IHT charge. This is achievable when assets qualify for some sort of relief such as business property relief or agricultural property relief. If an individual has these assets therefore, a trust structure may be more suitable.
  • There is an element of double taxation in using the company structure. The profits are first subject to corporation tax at a rate of 20% and then are subject to income tax when they are subsequently distributed to the shareholders.
  • The company will have to comply with company filing regulations, but there are also costs to consider when setting up and running the alternative of a trust.

For further information regarding the Family Investment Companies, please contact Trevor D'Sa, Private Client Tax Director on 0207 396 4365 or via email tdsa@haysmacintyre.com

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