Family Investment Company & Tax Planning

A family investment company and tax planning go hand in hand. Years ago trusts were a tax efficient way to deal with Inheritance tax. Changes in trust tax law means trusts may no longer be a preferred vehicle. Since 2006 most trust property is listed as “relevant property”. What are the tax implications of these changes?

• The settlor makes an immediately chargeable transfer with each asset into any relevant property trust.
• A 6% exit charge on distributions or dispositions from the trust. In the first ten years since property was first added to the settlement.
• A 6% ten year anniversary charge.
• Trusts can also pay up to 45% on income.

You can get further information on trusts from the following link on the government website.

What is a family investment company?

A family investment company (FIC) is a corporate structure. FIC’s are designed for immediate family members considering succession planning and wealth preservation. They are designed to work in a similar way to a discretionary trust. family investment companies are all different. As each is tailored to the specific needs of the family.

Each FIC has a memorandum of association and shareholders agreement. In addition they can also have a family constitution. These documents provide family governance procedures.

Benefits of a family investment company?

• If cash is paid into the company there are no tax implications.
• Assets are protected in the case of divorce.
• In the case Prest Vs Petrodel 2013. The Supreme Court ruled that family courts could not seize assets of a company in divorce.
• Ex-spouses cannot hold shares in a family investment company. The shares will have a value. But considering their sale is highly restricted their value is highly negotiable.
• Dividend income received is not subject to tax.
• Other income and gains are currently taxed at 20%, from April 2017 at 19%, from April 2020 at 18%.
• Indexation allowance can be claimed for capital gains.
• On incorporation shares can be gifted. Treated as a potentially exempt transfer for Inheritance tax purposes. So there is no immediate tax charge. After seven years the gifted shares are exempt from IHT.
• Family investment companies are controlled by the board of directors. Investment decisions and profit distribution. So there is no need to hold majority shares.
• Shareholders can receive different levels of income at different times.
• Minority shareholders benefit from a substantially discounted share value for Inheritance tax purposes.

Some down sides to consider

• A non-cash transfer into the company may incur a capital gains tax charge.
• There is a double tax charge implication. Profits are subject to corporation tax. Then to income tax when dividends are paid to shareholders.
• The company will have to comply with companies’ house filing regulations.

Finance Equation Ltd work with specialist lawyers to help structure your family investment company to your best advantage. Contact us for more information.