Traditionally, trusts have been used as the main method for families to pass their wealth on to future generations. A family investment company (FIC) offers, for many, a more tax efficient method of succession planning.
An FIC is a UK private limited company owned wholly by family members (the shareholders).
How do family investment companies work?
A limited company is formed, providing for two classes of shares. Class A shares are held by you and give you the right to appoint directors of the company and vote at general meetings. Class B shares are given to your chosen ‘beneficiaries’. These shares have no voting rights and do not allow the beneficiaries to control the company. However, the Class B shares provide a full entitlement to dividends and return on capital whereas the Class A shares do not.
What should I put in a family investment company?
Ideally, the FIC should be set up using cash as opposed to property. This is because there is no tax on the transfer of the cash into a company. Take care if you are considering transferring non-cash assets, such as property, as capital gains tax could arise.
Another option is to fund the FIC by way of a loan. This could be repaid by the company while underlying capital will grow in the name of the beneficiaries.
If you want to plan using non-cash assets, a trust structure might be more suitable.
Is there any inheritance tax to pay?
Transfers into lifetime trusts can attract inheritance tax at a rate of 20% in certain circumstances. This is usually when the amount put into trust exceeds £325,000. In contrast, a transfer of funds into an FIC will not attract inheritance tax and there will be none to pay, so long as you survive seven years from transferring the funds.
Where you have assets subject to relief, or below the threshold of £325,000, it might still be more efficient to use a trust.
What sort of control can I have over the assets?
As long as the company’s articles of association are adequately drafted you will be able to retain a certain element of control.
What tax will be paid?
The company is liable to corporation tax on the profits that it generates. The current rate of corporation tax is 25%.
The shareholders of the company will only pay tax if the company distributes income to them. Any profits retained in the company will suffer no further tax.
It is vital that tax advice is sought early on in the advising stage. We are well placed to work seamlessly with your chosen tax adviser. We also have many professional connections with well-respected tax advisers who can assist.
If you want to find out more about family investment companies, contact our team today for a free initial telephone conversation. Call 01752 203500, email enquiries@GAsolicitors.com or use our online enquiry form.