Family Investment Companies: a trust in corporate clothing?

24 May, 2018

A Family Investment Company is a tax efficient alternative to setting up a family trust.

What is a Family Investment Company?

A Family Investment Company (FIC) is a UK-resident private company whose shareholders are all family members. When setting up the company, you can choose to issue different classes of shares, separating out the voting rights and the rights to income and capital. Typically, the senior generation set up the company and retain control by keeping the voting shares and acting as directors. They then gift the capital shares and, often, the income shares to children and grandchildren.

The ‘Articles of Association’ of the company will record exactly how the family want any funds to be distributed or shares transferred. Significantly, the Articles, identities of directors and shareholders and the annual accounts of the company will all be available to the public. A family concerned about confidentiality may choose to supplement the Articles with a shareholder agreement, which can be kept confidential.

How does taxation treatment compare?

Trusts are attractive if the assets put into them qualify for business or agricultural property relief from inheritance tax (IHT).  Any other assets settled into a trust will be subject to

  • a 20% lifetime IHT charge on any value over the available nil rate band allowance (currently £325,000), and
  • IHT of up to 6% every ten years and on capital distributions from the trust where the value exceeds the nil rate band.

In contrast, for a FIC

  • if set up with cash, the transfer into the company will be tax-free – non-cash assets may incur a capital gains tax charge of up to 28%.
  • the gift will be a potentially exempt transfer, meaning no IHT will be payable on that element of the donor’s estate, if the donor survives for 7 years.
  • FICs are not liable to IHT charges every 10 years or on capital distributions.
  • Corporation tax is payable at 19% on any profits generated, falling to 17% by 2020.
  • Shareholders pay income tax on dividends, but only where the directors choose to pay out income. If the profits are retained in the company, no further tax is payable.

Conclusion

A FIC should seriously be considered as an alternative to a trust. If you would like to discuss FICs further, please contact Clare Savory on 01892 506 213 or at clare.savory@crippspg.co.uk