Family Investment Company
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A Tax-Efficient Way to Secure Your Family’s Future.
A tax-efficient way of securing your family’s future is one option that has been considered by families in the UK over the last years, with the key objective of minimising Inheritance Tax. The FIC is among options that have grown the fastest and are popular among people who look at ways of achieving this. It is a tax-efficient vehicle in which one is able to retain control over assets while passing on wealth to the next generation.
But what is a Family Investment Company, and why are so many families turning to this particular approach in light of the constant changes in the tax laws and regulations at HMRC?
In this article, we will take a closer look at precisely what a Family Investment Company is; how it can benefit your family; the key guidelines from HMRC you need to be using, and why it could just prove to be the perfect tool to help secure your family’s financial future.
A Family Investment Company, or more widely referred to as a family investment vehicle, is a private limited company holding investments that may include property, shares, or other financial assets. Such a structure provides the means for the founders — usually parents or grandparents — to retain control over the assets of the company while allowing the economic value of that wealth to pass down, in a tax-efficient manner, to generations beneath it on the tree.
In the normal FIC structure, the founders become the directors of the company and hence control it in terms of investment decisions, while the family members — the children or grandchildren — become the shareholders and hence allow benefits in the nature of growth in value of assets over time.
Why Is a Family Investment Company Attractive for UK Families?
In these circumstances, the UK tax environment has continued to move apace, with HMRC narrowing its focus further and further on tax planning opportunities. Beyond this, families have looked for valid ways in which to safeguard their wealth. An FIC can provide the right combination of tax efficiency and asset control.
For manifold reasons, more and more families are setting up FICs, some of which are mentioned below:
- Reduction of Inheritance Tax: The main purpose for which a family would utilise the structure of a Family Investment Company is to reduce liability to IHT. This, arguably, is the most important factor for estates in excess of the IHT nil rate band of £325,000 because a family can have control over how and when the wealth passes to the next generation as a result of shifting the wealth within an FIC, thereby minimising the risk of an IHT charge.
- Retain Control over Assets: Unlike trusts, in situations where an FIC is used, asset control can be vested in a manner allowing the founder to retain control as a director while value is transferred to younger family members. Thus, parents or grandparents retain oversight over investments and distributions and pass on future wealth.
- Tax Efficiency: The company’s profits are liable for Corporation Tax, currently at 25%, often much lower than the rate of personal income tax. This allows retained profits to grow more efficiently than they would have if subjected to tax at personal income rates.
- Flexibility in Investments: FICs offer flexibility in the nature of investments—whether it’s property, shares, or other financial instruments. This allows for diversification while maintaining family control.
While Family Investment Companies are a powerful tool for wealth management, strict adherence to HMRC guidelines is essential to avoid tax pitfalls. The key points are as follows:
- Compliance with Corporation Tax
Since the FIC is a limited company, it is liable for Corporation Tax on profits made at the rate of 25%. Accurate tax reporting is paramount to ensure compliance and avoid scrutiny from HMRC. - Inheritance Tax and Wealth Transfer
FICs help reduce Inheritance Tax if structured correctly. For instance:- Founders retain voting shares, maintaining control while passing non-voting shares to family members.
- Gifting assets to the FIC creates a Potentially Exempt Transfer (PET), falling outside the founder’s estate if they survive seven years.
- Dividend Payments and Income Tax
Profits can be distributed as dividends, subject to income tax at the shareholder’s marginal rate. Current dividend tax rates are:- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Smart tax planning involves paying dividends to family members with lower tax liabilities.
- Record Keeping
HMRC expects companies to maintain proper books and records. This is especially crucial for FICs, as poor record-keeping may trigger an HMRC audit.
Setting up an FIC requires careful planning. Here’s a brief overview:
- Incorporate the Company: Register the Family Investment Company as a limited company with Companies House.
- Allocate Shares: Structure shares to allow founders to retain voting rights while passing value-bearing shares to the next generation.
- Transfer Assets: Transferring assets into the company might trigger Capital Gains Tax, so professional advice is key.
- Directors and Shareholders: Appoint directors (usually the older generation) and shareholders (children or grandchildren).
- Investment Strategy: Define the company’s investment strategy to align with long-term family goals.
The benefits of FICs—such as tax efficiency and control—are significant, but they may not suit everyone. FICs are typically used by high-net-worth families looking to pass down wealth in a tax-efficient manner while retaining control over assets.
A Family Investment Company offers flexibility and control, helping to protect your wealth while mitigating Inheritance Tax liabilities. However, working with professional advisers ensures that your FIC is structured according to HMRC regulations and aligns with your family’s long-term goals.
At Lawrence Grant, we specialise in helping families set up and manage Family Investment Companies. Contact Us to discuss how we can help secure your family’s financial future.