A family investment company (FIC) is a company that invests rather than trades. The investments are usually equity portfolios or property.
The FIC is set up by the founder transferring cash or assets usually by way of a loan. Any profits arising from the investments are taxed at corporation tax rates rather than income or capital gains. This can create a tax saving of over 25% for an individual paying tax at additional rates. Furthermore, on an equity portfolio, dividends can be paid to a limited company free from tax creating an even larger tax saving.
The structure also offers Inheritance Tax (IHT) advantages and is therefore becoming an attractive alternative to a trust, particularly with entrepreneurial clients who are more familiar and comfortable with a company structure rather than a trust.
Usually a FIC is set up with a founder share held by the individual providing the capital, with other family members brought in as shareholders. Different classes of share are often issued to enable flexibility around payment of dividends. It is also possible to create redeemable preference shares to extract capital at no cost.
The founder shareholder generally maintains control over the investments (or is responsible for appointing an adviser) and the payment of dividends. The Articles of Association and the shareholders agreement can be drafted to protect the shares from sale outside of the family, making this type of structure more effective in a divorce.
The investment is usually made by way of a loan and this can be repaid from profits tax free. It should be noted that there can be issues with settlements legislation where loans are involved, although assigning part of the loan to the other shareholders should remove any risk of challenge by HMRC.
The company wrapper shelters the investments from income tax until the funds are extracted from the company. When profits are extracted the shareholders will be liable to income tax on any
amounts received. Payments are usually made by way of dividend and are subject to rates as outlined below.
The FIC is created to benefit the family and as such parents and children are generally included as shareholders. It is also possible and can be beneficial to include a trust as a shareholder to offer more flexibility.
Dividends paid to minor children are taxed on the parents. However, for children over 18, payment of a dividend up to the basic rate band can be a very efficient way of extracting funds to help with costs such as university fees.
It is not generally beneficial to pay dividends to the founder shareholders as their income levels are usually high. The combined tax rate of the company and the income tax would be higher than if the asset was held directly.
The FIC structure is of most benefit where the capital and income can be retained within the company for long periods, or indeed used as a structure to pass on to the next generation in the same way one would use a trust.
As with income tax, any assets sold within the company would be charged at corporation tax rates rather than Capital Gains Tax (CGT).
Profits on gains arising would be extracted in the same way as outlined above.
On the sale or liquidation of the company the shareholders would be charged to CGT on the value of their shares less any cost. As shares are likely to be subscribed for at par, CGT will be charged on the whole increase in value usually at 20%.
One of the main advantages to a FIC are the IHT benefits. Not only is value passed to the other shareholders on the creation of the company (subject to the seven year survivorship rule) but any increase in value of the investments is transferred immediately. Additional shares can be transferred at a later date, possibly to a trust structure. As the value of the founders shareholding diminishes so the value of the other shareholders increases thus reducing the IHT exposure in his estate further.
There is no 'one size fits all' to planning an FIC however there are considerable savings to be made where the structure is appropriate. As with any tax planning there are risks for example HMRC could change the rate of tax on investments, therefore we would recommend you seek professional advice before any action is taken.