There are two main reasons to set up a Family investment company in order to manage your investment portfolio and save a significant amount of money in various taxes.
First, you want to manage your own investments but still have access to the capital and the income. This may be because you want to keep sufficient funds to make sure that if you ever need long-term care, you have access to your capital and your income.
Other reasons might be that you have significant assets well over £1 million and you may not live long enough to use Trusts to place money outside of your estate.
If you want to access the funds, most people are happy to use a Flexible Reversionary trust, because it allows them access to income and capital back over a period of 7 years. However, you must use a pooled investment managed by a fund manager in that plan. If you want to manage your own funds, a Flexible Reversionary trust will not do it for you. A Family Investment company will. It will allow you to do this as there are no fund restrictions – you can manage the fund and hold whatever assets you like.
This depends on your longevity. You can only place £325,000 per person into a Trust every seven years without generating an immediate tax charge of 20% on any amount exceeding the Nil Rate band allowance. For example, if you place £525,000 into a Trust the extra £200,000 will attract an immediate 20% tax charge. You can place £325,000 in straight away and then do the same again in 7 years' time. You must bear in mind you must live 7 years after the date of the last gift in order to avoid the IHT charge on that particular gift.
Therefore, placing money into a trust past age 75 to 80 carries a significant longevity risk. This means that older people with a significant asset base may not live long enough and may not have long enough life expectancy in order to use only Trusts.
This is when an FIC may prove to be very useful.
However, there are points you need to be careful about.
Never mix an investment Family Investment company with a property Family Investment company. If necessary, you can have 2 Family Investment companies, or at the very minimum hold a property portfolio in a subsidiary company of the FIC which holds the main investment base. This is because if a tenant dies in one of your properties and you get sued, the most they can take is the value of the properties and they can’t touch all the other assets. If you mix everything into one company, you carry a significant risk of losing everything in that company.
When you set up an FIC with an investment portfolio, you need to be careful about the capital gains. Although you can transfer an asset directly into a Family Investment company, it is deemed as a disposal for capital gains tax purposes and therefore the capital gains tax is immediately payable.
A lot of the time, people will surrender their investments and place cash into the Family Investment company. This has the added advantage of the cash going into the company being seen as either a shareholder’s loan or a director’s loan.
As your investment portfolio produces a return over time, you can take that return out of the company for the rest of your life as repayments of those director’s loans completely free of all income tax.
Since the director’s loan or the shareholder’s loan is still in your estate, you shouldn’t keep it past the age of 78 or earlier if you have health issues. You need to give it away for it to be outside of your estate. This can be done by giving up the director’s loan to your children directly and they will be able to withdraw the funds tax-free.
Director's loans and shareholder’s loans are a very sensible tax planning vehicle especially if you are putting cash into a Family Investment company.