Dipesh Galaiya BSc (Hons) FCA
- Private Client Tax Senior Manager
- +44 (0)330 124 1399
- Email Dipesh [email protected]
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A big desire for many parents and even grandparents is to grow their investments and preserve these assets for the long term benefit of the family, in a tax efficient manner.
The solution may be a Family Investment Company (FIC). A FIC is a company just like any other. It has shareholders which can include various family members and directors who are usually the custodians or those who fund the FIC. Through the appointment as directors of the FIC, you maintain overall control over the assets of the FIC.
FIC’s provide a very good structure which allows your children to be involved with your investments, as ultimately they take up the mantle.
There are different ways of funding a FIC – subscribing for shares in the FIC using cash or selling assets (e.g. property) to a FIC. Ordinarily, a FIC will not have a cash reserve when it is set up and therefore if you sell an asset to a FIC, it will be in exchange for an I-O-U (a loan which the FIC will owe you). Alternatively, you can lend a cash sum to the FIC. The I-O-U being repayable to you in the future, tax free.
Subscribing for shares in a FIC (or lending cash sums to it) does not trigger any tax charges. But selling assets (e.g. property) will result in a capital gains tax charge, on the difference between the asset’s current market value and the original acquisition cost, as well as stamp duty land tax.
None of the above strategies enable you to mitigate inheritance tax immediately. However, if you owned an asset that is then sold to the FIC, your ownership of the asset is replaced by a proportion of the FIC, through your shareholding, and an I-O-U. In time, a proportion of the growth of the company will lie outside of your estate for inheritance tax purposes due to you holding less than 100% of the share capital. Furthermore, if you don’t require these funds then you can consider gifting the I-O-U to your children or grandchildren. This will be a potentially exempt transfer and the gift will fall outside of your estate upon survival for 7 years, thereby achieving greater IHT mitigation.
Assets, for example property, generate annual income (e.g. rental profits) which may be ordinarily taxed on you at the income tax rates of 40% or 45%, but with the above planning this income stream will accrue under a FIC which will attract corporation tax currently at 19%.
As the provider of capital to the FIC, you can have a shareholding in the company which enables you to have access to income from the FIC via dividends. The FIC can issue shares of different classes (otherwise known as alphabet shares) to different shareholders which gives further flexibility on which share classes have a right to future dividends. This flexibility is especially important where you have minor children / grandchildren. ‘Minor’ in this article refers to someone who is below the age of 18 years.
Where the FIC is set-up by parents and shares are issued to minor children, any dividends paid to minor children (above £100) will be taxed on the parents. Therefore, the alphabet shares enable dividends to be paid to adult children who can utilise their personal allowances and thereby pay no or very low income tax – very effective for funding higher education.
Where the FIC is set-up by grandparents and shares are issued to minor grandchildren then any dividends paid to minor grandchildren will not be taxed on their parents, but rather the grandchildren can utilise their personal allowances and thereby pay no or very little income tax. This is particularly useful for school fees planning.
The I-O-U also enables you to extract monies (up to the value of the I-O-U) from the FIC tax-free.
Depending on your circumstances, you can also add a trust structure to hold the shares in the FIC for any children / grandchildren. This helps with protecting the FIC’s assets for the long term against events such as marital breakdown, insolvency or bankruptcy, etc . As a Trust can have a life of 125 years, this can enable the assets to benefit multiple generations of the same family.
For further information on the use of trusts for investment properties, please refer to our article ‘Keeping property within your family‘.
Through careful planning, you can grow your investments and get your family involved whilst protecting these assets tax-efficiently for the long-term benefit of the family. If you would like to discuss these plans with us then please get in touch.
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