The Rise of Family Investment Companies in Wealth Planning
Family Investment Companies (FICs) have increasingly been gaining in popularity whilst Family trusts are falling out of favour. The primary driver for this has been government policy over the past decade or so, which makes Family trusts less attractive than they used to be in the past. In this article we explore why FICs can be an effective wealth planning tool.
A FIC is a company which is set up with the specific purpose of meeting the needs of a family. It allows the family wealth to be protected as far as is possible. FICs enable ownership of assets to be separated from control over them and ultimately, they can limit the exposure to inheritance tax. FICs can also be advantageous in reducing income and capital gains tax liabilities. Clearly, no single wealth structure will meet all the varying needs of a family so the overall solution may depend on their main priorities. It may also be worth considering a combination of structures for the most efficient outcome.
Why are FICS attractive?
There is good reason for the rise in popularity of these wealth structures. Here are some of the key features of FICs:
- Wealth can be passed on to the next generation whilst retaining control of the underlying assets
- They offer protection for assets if a shareholder goes through a divorce
- Income or gains can be accumulated more tax efficiently in FICs than within a trust or even if held personally
- The flow of income and capital can be controlled and any liability to personal tax can be managed
- A FIC provides a governance structure to help manage a families’ wealth
- A FIC is permitted to deduct certain business expenses such as management costs, professional fees, salaries, and pension contributions. Interest on loans to purchase investments is also deductible against the profits of the FIC
- In addition, certain income such as qualifying dividends from company shares should not be subject to tax in a FIC
- Whilst a company structure can result in a double layer of taxation; where a FIC is funded by way of shareholder loans, then funds can be extracted tax free on repayment of these loans
- Dividends can be a flexible way of shareholders extracting profits particularly where there are different share classes. This can help to optimise the tax liability amongst family members. The first £2,000 of dividend income usually falls within the tax-free dividend allowance
- For dividends in excess of this, depending on the level of the shareholders overall income will be taxed at 7.5% for basic rate payers, 32.5% for higher rate taxpayers and 38.1% for additional rate payers (Note: for dividends paid after 5th April 2022, these rates increase by 1.25%)
It is worth noting that, the Government has announced that there will be an increase in the corporation tax rate from April 2023. This may impact FICs in the future, particularly if they fall within the definition of a close investment holding company as such companies will not benefit from the small profits rate or marginal relief. Even so, they continue to remain attractive from a tax perspective.
And what about trusts?
Trusts also have a role to play in estate planning and often can form part of an overall solution. It is important that a balance is found between the way in which assets are held and the different tax consequences that one might be exposed to.
Since most trusts fall within the “relevant property regime” there has been less use of trusts. The difficulty is that assets can only be transferred into trust up to the value of the nil rate band (£325,000). Where amounts are settled above this amount there would be an immediate IHT lifetime charge at 20% with further charges every ten years through the life of the Trust.
A discretionary trust can be used where it is desired to benefit a number of beneficiaries and one wants to maintain flexibility in relation to the proportions. It gives the trustees wider powers over the investments and the distribution of funds. The beneficiaries of a discretionary trust have no fixed right to receive capital or income. This may have the advantage of protecting the trust funds if the beneficiaries have any creditors or go through a divorce.
What is HMRC’s view of Family Investment Companies?
Following the increased popularity of FICs in recent years, HMRC undertook a review which they have now completed. Some of the observations from that review are:
- The changes in trust legislation, and the related cost of using a trust has resulted in less taxpayers using trusts to hold family assets
- FICs have become more popular than trusts since they are much easier to set up. Generally, the shareholders of FICs are made up of two generations, they often have multiple classes of shares, and the older generation tends to retain the voting control
- FICs generally hold investments, which includes stocks, shares or property
- HMRC found that the assets comprised in a FIC are on average worth £5m; they are used by wealthy taxpayers (HMRC’s criteria for those taxpayers dealt with by its Wealthy Unit is annual income over £200,000, or those with wealth of over £2m)
- FICs are often used to enable wealth to be passed down to the next generation and to mitigate inheritance tax
- Although one cannot rule out any specific legislation that might arise in the future, HMRC accepts that there are often commercial reasons for establishing FICs
So, in summary, the company structure can be used to facilitate estate planning and wealth can be passed on without triggering an immediate tax charge. Control over the assets can be maintained more effectively and assets can be protected from the impact of events like a divorce. It also allows for the tax efficient accumulation of wealth. Little wonder then that their popularity among high-net-worth individuals are firmly on the rise. Please speak to a professional adviser if you would like to find out more.
Would you like to know more?
If you have any questions above the above, please get in touch with your usual Blick Rothenberg or contact Mark Levitt using the form on this page.