Growing and preserving your family’s assets
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 be 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.
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 and your spouse owned an asset which is then sold to the FIC, your ownership of the asset is replaced by the ownership of a proportion of the FIC and an I-O-U. In time, the growth of this asset will lie outside of your estate for inheritance tax purposes.
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% (and much lower than income tax rates).
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 are issued with 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. 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.
To make this more interesting, you can also add a trust structure to hold the shares in the FIC for any minor children / grandchildren. This helps with protecting the FIC’s assets for the long term against events such as marital failure, insolvency or bankruptcy, etc . As a Trust can have a life of 125 years, this can enable you to ‘skip generations’.
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.
Subscribe to our newsletters
Our complimentary newsletters and event invitations are designed to provide you with regular updates, insight and guidance.
You can unsubscribe from our email communications at any time by emailing email@example.com or by clicking the 'unsubscribe' link found on all our email newsletters and event invitations.