Family Investment Company Tax Planning

A Family Investment Company (FIC) is a private limited company set up to hold, manage, and grow family wealth, with family members as shareholders. FICs have gained popularity as a tax-efficient vehicle for passing wealth to future generations. Here are some tax benefits and limitations of using an FIC for wealth management:

Tax benefits:

1. Corporation Tax rates: FICs are subject to Corporation Tax on their profits, which is currently lower than the highest rates of Income Tax. As of the 2021/2022 tax year, the Corporation Tax rate is 19%, compared to the additional rate of Income Tax at 45%. This difference allows for potential tax savings on retained profits within the FIC.
2. Dividend payments: FICs can distribute profits to shareholders as dividends. Each shareholder has a tax-free Dividend Allowance (£2,000 as of the 2021/2022 tax year). Dividends received above this allowance are taxed at lower rates than those for other income (7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers).
3. Inheritance Tax (IHT) planning: FICs can be structured to facilitate IHT planning through gifting shares to family members or trusts. The value of the shares may be subject to IHT, but the seven-year potentially exempt transfer (PET) rule applies. If the donor survives seven years after gifting the shares, the gift will be exempt from IHT. Additionally, if the FIC invests in business assets that qualify for Business Property Relief (BPR), those assets may also be exempt from IHT after two years of ownership.
4. Control and flexibility: FICs allow founders to maintain control over the company’s assets and investment strategy while transferring wealth to the next generation. Different classes of shares with varying rights can be issued to provide the desired balance of control and benefits among family members.

Limitations:

1. Anti-avoidance rules: FICs must be structured carefully to avoid falling foul of anti-avoidance rules, such as the General Anti-Abuse Rule (GAAR) and the settlements legislation. HMRC may challenge tax planning arrangements that are considered abusive or artificial, leading to additional tax liabilities and penalties.
2. Ongoing compliance: FICs are subject to the exact compliance and reporting requirements of other limited companies, including annual accounts, Corporation Tax returns, and Companies House filings. Shareholders must also report dividend income on their Self Assessment tax returns.
3. Liquidity: Shares in an FIC may be less liquid than other investment vehicles, as the company is not publicly traded. This may make it more challenging for shareholders to sell their shares or access funds when needed.

Example: Suppose a high net worth individual (HNWI) wants to pass on significant wealth to their children. They establish an FIC, contributing capital to the company in exchange for shares. The FIC invests in a diversified portfolio, generating income and capital growth. Over time, the HNWI gifts shares in the FIC to their children, gradually transferring wealth to the next generation while retaining control over the company’s investment strategy. This approach can save tax through the lower Corporation Tax rate and the potential IHT exemptions.

In conclusion, FICs can offer tax benefits and flexibility for families looking to pass on wealth efficiently. However, it is crucial to carefully structure the FIC to comply with HMRC guidance and avoid anti-avoidance rules. It is advisable to consult a tax professional to ensure the FIC is set up and managed correctly to maximize its tax efficiency. You can call us to discuss your personal circumstances with our specialist tax advisors.