Tax  

Family investment companies are growing in popularity

Emma Shipp and Katherine Hague

Emma Shipp and Katherine Hague

If your clients are currently wrestling with the problem of how to pass wealth onto the younger generation in their family without losing control over decision making, there may be a simple answer in the shape of a family investment company, or FIC. 

It is a company where the bespoke constitution documents allow those injecting cash or other assets (possibly parents or grandparents) to retain decision-making rights, while releasing the rights to income and capital to other shareholders – usually the younger generations.

There are many permutations of FIC structures, and the rights that can be given away and those that can be retained.

The most common is for cash to be placed into the company by parents and for shares to be issued, allowing them to control decisions such as those about the investment strategy and the declaration of dividends.

The children are issued with shares carrying the right to receive dividends and a return of capital, but with limited decision-making capability.

The ability to transfer shares is limited to members of the family only.

However, it is worth bearing in mind that, despite the limited rights attaching to income shares, the holders of these shares will have rights as shareholders which may not have been intended by the parents.

Changes to the rights attached to these income shares cannot be made without the consent of the shareholders and, ultimately, these minority shareholders may be able to raise a claim for prejudice if they feel unfairly treated by those wielding the decision-making shares.

An FIC is an attractive option, particularly for those who are used to running businesses and are looking to pass on substantial wealth.

They are not subject to the limits of a traditional trust structure – a 20 per cent initial inheritance tax charge on amounts exceeding the nil rate band (£325,000) and 10-yearly IHT charges.

Further, FICs present a tax-efficient means of accumulating profits, as the effective corporation tax rate is currently 19 per cent but will fall to 17 per cent from April next year, as opposed to the 45 per cent income tax rate for discretionary trusts.

Similarly the capital gains tax rate for FICs will fall to 17 per cent in April next year, which is below the 20 per cent currently paid by higher rate taxpayers on gains.

Certain payments made by the company, such as interest on loans and investment management fees, attract tax relief.

Extracting profits from the company will give rise to a further tax charge but the impact can be mitigated with careful planning.

FICs have been steadily gaining in popularity, particularly because of the benign tax environment.

However, caution should be exercised as the tax rules and rates can change relatively quickly, which introduces an element of uncertainty.

In addition, the tax charge when profits are extracted can negate the beneficial tax treatment within the company.

Generally, if a family will need to extract profits regularly then a different type of vehicle may be better.