In February 2021, Pete Heslington, Partner at Praxis kicked off our LTS webinar season with a talk on Family Investment Companies. In this article, we provide a summary of useful points and takeaways from the presentation.
The concept of Family Investment Companies (“FICs”) is not a new one, but it has been modified and developed significantly over the past few years to become a very popular alternative to trusts in providing income tax planning as well as wealth protection for families.
What are Family Investment Companies?
A FIC is a company with a bespoke constitution (known as its Articles of Association), which are written to form a family-owned and controlled investment company. A bespoke constitution allows for tax-efficient income distribution across family members as well as a shelter from inheritance tax for assets such as property, art, and equities.
In a similar way to a trust, a FIC provides for the separation of the ownership and management of the assets. This allows parents and grandparents to control how monies are invested and determine how much – if any – cash should be paid out to shareholders.
Being incorporated as a limited company means that our clients are familiar with the structural concepts and administrative requirements, making a FIC the perfect solution for managing family income and wealth.
What are the benefits of Family Investment Companies?
The major benefits of FICs are those of tax efficient income planning, inheritance tax planning, and wealth protection. These benefits can be realised whilst still ensuring control remains with the senior members of the family and those that transferred assets to the FIC.
Income Tax Planning
Tax efficient accumulation of income in a FIC
Income and capital gains as corporate tax rates (19%) are generally lower than personal tax rates.
Dividends received from share portfolios normally exempt from corporation tax.
Corporation tax deductions available in respect of interest on loans and management expenses.
Tax losses can be carried forward and offset against its future profits.
Tax efficient extraction of profit from a FIC
Dividends can be paid on different share classes, making it possible to allocate income to low tax or non-taxpaying family members.
Dividends can be paid into a family trust and distributed out to the intended beneficiaries
Estate and Inheritance Tax Planning
Transfer wealth to future generations in a tax efficient manner by carefully managing the class rights of the FIC’s shares.
Avoid any immediate charges to tax when gifting shares in the FIC.
“Give away” the future growth in value of the assets to the younger generation whilst preserving some or all of the historical value to the older generation.
Where the donor of the gift of FIC shares survives for seven years, the value of the gift will fall outside of their estate for inheritance tax purposes, potentially avoiding up to 40% in tax on assets passed on.
Due to the way HMRC tends to view share valuations, it is possible to use “minority discounts” to cause some of the value of the FIC to escape IHT completely.
What if something changes in the family?
Family disputes as well as bankruptcy, death and divorce are a sad fact of life. Measures to deal with these eventualities could be to include the following example provisions within the Articles of Association:
Compulsory share transfers in respect of divorce, death, or bankruptcy.
Provisions to prevent non-lineal descendants from owning shares.
Provisions such that share transfers can only take place to a “permitted class”.
Setting a dividend policy for the FIC which cannot then be overruled by a Court.
The day-to-day management and control of the FIC would rest with its directors so decision-making with regard to what investments to make, the level of any dividend or to whom the dividend is paid can be controlled by a select group.
In the current economy and with a government needing to bolster its coffers it is widely anticipated that the capital gains tax rate will increase in the near future and, if there was ever a time for income, wealth and estate taxes to increase, the largest government budget deficit in peacetime history is possibly the cover needed. Family Investment Companies provide the opportunity to protect the income and wealth of you and your loved ones in a relatively straightforward manner and with the flexibility to adapt to future changes to legislation as well as within your family.
Please contact Praxis for further information.
You can find a summary of useful points and takeaways from our Corporate Criminal Offence webinar here.