Family Investment Companies: The tax benefits

Family Investment Companies (or “FICs”) have become the preferred vehicle for structuring wealth and passing assets onto future generations tax efficiently, increasing in popularity in recent years as a result of their flexibility in comparison to trusts.

They come with a wide range of tax benefits and in this short article, Verallo’s Ollie Turner explains how FICs are typically structured and explores the tax benefits of using FICs.

How to structure a FIC

What is a FIC  and what are the steps required should you wish to establish one?

Generally, a FIC is a private limited company, incorporated in the UK to hold investments for a family. They are often used to acquire property but can also house investment portfolios as well as shareholdings in other private companies.

A FIC is usually incorporated with subscriber shares issued to individual family members. Family members are entitled to receive income by way of dividends and/or a return of capital on disposal of their shares, subject of course to the rights assigned to each shareholder.

Often, control of the company (through voting rights assigned to particular share classes) is separated from economic entitlement to value (through capital rights) and this is achieved by way of structuring the share capital of a FIC into different classes of share. Control and decision-making power is to be vested in a small number of individuals, possibly the older generations in the family, whilst the economic interests can be held by particular family members who are perhaps younger and less exposed to a potential inheritance tax liability.

As a result, family wealth can often be sheltered from inheritance tax whilst control over assets remains with the older generations.

Tax benefits

In addition to inheritance tax efficiencies, other tax benefits can arise as follows:

• Dividends – Most dividends received by a UK company (including foreign dividends) are exempt from corporation tax. Investment income in the form of dividends received personally can be subject to significant income tax charges.
• Management expenses – Expenses incurred by the company in managing its investments and running its business will be eligible for corporation tax relief.
• Tax rates – The company will pay corporation tax at 25% which is significantly lower than the top rates of income tax (currently 45%).
• Capital gains – Capital gains realised by the company are chargeable to corporation tax at 25%. However, where the asset disposed of is shares in a subsidiary company, Substantial Shareholdings Exemption may be available to exempt the gain.
• Tax relief on interest – The company will be able to claim a corporation tax deduction for interest on loans taken out against the value of its investments, where the loans are used for the purposes of the company’s business. Loans taken out by individuals to acquire residential property are subject to restrictions around the deductibility of interest.
• Income – Profits of the FIC can be distributed to shareholders by way of dividends. Where shareholders do not have any other income (perhaps they are studying at university for example), they can be paid dividends of circa £13,000 per annum free of income tax.

These are just some of the main benefits, but to find out more about the advantages of a Family Investment Company and how we can support you in the setting up, call us on 0203 912 9933, or email info@verallo.com.