Family Investment Company

Protect your Assets through a Family Investment Company

If you have assets over £2 million, excluding the value of your main residence, we may advise that you look into setting up a Family Investment Company (FIC). Doing this would allow you to pass on your wealth to your children by way of shares in that company.

At Bluebond Tax Planning, we provide our clients with a comprehensive solutions to all the legal,tax and financial planning elements, which is essential to provide you with the most suitable IHT advice

Why set up a Family
Investment Company?

Setting up a Family Investment Company will allow you to place cash or assets into that company, and pass on your wealth free of inheritance tax (after 7 years) but retain control over the asset during your lifetime.

Companies also offer a more effective tax environment for growth assets than holding them personally.

This is especially true for rented property and therefore this is often a method recommended to our clients who have significant property portfolios.

Why set up a Family
Investment Company?

Setting up a Family Investment Company will allow you to place cash or assets into that company, and pass on your wealth free of inheritance tax (after 7 years) but retain control over the asset during your lifetime.

Companies also offer a more effective tax environment for growth assets than holding them personally.

This is especially true for rented property and therefore this is often a method recommended to our clients who have significant property portfolios.

Controlling your Family Investment Company

As you will be named as a director and be a preferential shareholder, you will have all voting rights and therefore control over the capital held in the FIC.

It is important to understand that this will not give you rights to the capital itself as often the capital value will be gifted away to your children as an outright gift.

This means that after seven years, the value of the money or property transferred into the FIC will fall outside of your estate for inheritance tax purposes so long as you keep no beneficial interest in the company.

However, as a director of the company you retain control of the income from the assets of the company.

Controlling your Family Investment Company

As you will be named as a director and be a preferential shareholder, you will have all voting rights and therefore control over the capital held in the FIC.

It is important to understand that this will not give you rights to the capital itself as often the capital value will be gifted away to your children as an outright gift.

This means that after seven years, the value of the money or property transferred into the FIC will fall outside of your estate for inheritance tax purposes so long as you keep no beneficial interest in the company.

However, as a director of the company you retain control of the income from the assets of the company.

Family Investment Company advantages

  • One of the main advantages of a Family Investment Company (FIC) over a lifetime discretionary trust is that you are limited to placing £325,000 each into a Trust (otherwise 20% tax is immediately payable on any excess) but the is no upper limit on assets that can be placed into an FIC
  • Whilst FICs are subject to corporation tax on the income they receive. As Corporation tax is at a lower rate than either basic rate tax and Higher rate tax there can be significant income tax advantages. Also, mortgage interest is fully reclaimable and not subject to a 20% tax credit as would apply to personally held Buy to let property holdings.
  • Should the FIC hold an investment portfolio of UK companies, most dividends received by a UK company from other companies is currently exempt from corporation tax. This beneficial nil dividend rate for companies results in an increase in the growth roll-up of dividend income by deferring taxation until monies are distributed by the FIC.
  • There are other practical advantages, depending on the family’s approach to investments. For example, the FIC’s directors can choose to take greater risks from an investment strategy perspective than trustees might be comfortable with as trustees have to abide by trust law.

Family Investment Company
How does it work?

A shareholders agreement will need to be drawn up as a contractual document between the shareholders. The shareholders will only be family members and also a family trust or Employee Benefit Trust if applicable.

In order to make the Family Investment Company suitable to operate in a family estate planning context, it is effectively treated as a private limited company with bespoke articles of association. It requires specialist lawyers to set up an FIC but once set up it is taxed like any other Limited company.

It is important to bear in mind that companies are often subject to future tax changes and reviews meaning that there is a certain element of risk that a negative tax change may occur in the future. Therefore a mix of Trusts and an FIC is usually sensible.

Family Investment Company - roles and rights

The articles set out the different rights and interests for each of the shareholders in the company. By setting these share classes, often referred to as ‘alphabet shares’, each direct descendent family member can be allocated a different class of share. Spouses of children and grandchildren will not be allowed to own shares for protection against divorce.

This means the family members can have varying levels of control over company decisions, rights to receive dividends and entitlements to the capital value of the company.

If the assets currently belong to the parents, and they can use the company structure to transfer value and responsibility to their children dependent on Capital gains tax issues and their own income needs. This provides the parents with an effective method of controlling family wealth and their own income through their lifetime.

Protecting shares with specific clauses

An added benefit of protecting your wealth in this way is that the articles can be set up to include specific clauses that protect the shares in specified circumstances.

These can prevent shares being transferred outside of the family by restricting shareholders to immediate family or family trusts.

As an example, the article could state that should a child divorce their spouse, that ex-spouse will not be able to retain shares in the FIC, meaning that the assets should not be included within any divorce settlement.

Please bear in mind. However, that should the case be brought in front of family courts, a judge may have the power to pass other assets disproportionately to ensure a “fair” divorce. However, control of the company is retained in the family.

Share Transfers

As previously explained, the value of these shares will fall outside of the parent’s estate for inheritance tax purposes seven years after the share has been “gifted” from the parents to the family member.  There are some Capital gains tax considerations to be aware of in transferring the value and rights of shares from parents to other family members so the transfers can be carefully planned to control the timing and value that is transferred and the tax implications for the family shareholders.

With this in mind, loans of cash or assets from the parents is a common way of funding FICs initially (and therefore establishing the value the company has available to invest). The parents often hold preference shares based on repayment of loans to the company and can withdraw funds tax-free.  This is because the repayment of capital at base value is not subject to income tax or capital gains tax.

For owners of large property portfolios, this can mean both a significant reduction in inheritance tax, capital gains tax and income tax.

Setting up these companies effectively requires close cooperation between tax planners, accountants, lawyers and financial planners. – A network that Bluebond has already built and utilized for many clients.

Call us today if you require help in this area

Family Investment Company advantages

  • One of the main advantages of a Family Investment Company (FIC) over a lifetime discretionary trust is that you are limited to placing £325,000 each into a Trust (otherwise 20% tax is immediately payable on any excess) but the is no upper limit on assets that can be placed into an FIC
  • Whilst FICs are subject to corporation tax on the income they receive. As Corporation tax is at a lower rate than either basic rate tax and Higher rate tax there can be significant income tax advantages. Also, mortgage interest is fully reclaimable and not subject to a 20% tax credit as would apply to personally held Buy to let property holdings.
  • Should the FIC hold an investment portfolio of UK companies, most dividends received by a UK company from other companies is currently exempt from corporation tax. This beneficial nil dividend rate for companies results in an increase in the growth roll-up of dividend income by deferring taxation until monies are distributed by the FIC.
  • There are other practical advantages, depending on the family’s approach to investments. For example, the FIC’s directors can choose to take greater risks from an investment strategy perspective than trustees might be comfortable with as trustees have to abide by trust law.

Family Investment Company
How does it work?

A shareholders agreement will need to be drawn up as a contractual document between the shareholders. The shareholders will only be family members and also a family trust or Employee Benefit Trust if applicable.

In order to make the Family Investment Company suitable to operate in a family estate planning context, it is effectively treated as a private limited company with bespoke articles of association. It requires specialist lawyers to set up an FIC but once set up it is taxed like any other Limited company.

It is important to bear in mind that companies are often subject to future tax changes and reviews meaning that there is a certain element of risk that a negative tax change may occur in the future. Therefore a mix of Trusts and an FIC is usually sensible.

Family Investment Company - roles and rights

The articles set out the different rights and interests for each of the shareholders in the company. By setting these share classes, often referred to as ‘alphabet shares’, each direct descendent family member can be allocated a different class of share. Spouses of children and grandchildren will not be allowed to own shares for protection against divorce.

This means the family members can have varying levels of control over company decisions, rights to receive dividends and entitlements to the capital value of the company.

If the assets currently belong to the parents, and they can use the company structure to transfer value and responsibility to their children dependent on Capital gains tax issues and their own income needs. This provides the parents with an effective method of controlling family wealth and their own income through their lifetime.

Protecting shares with specific clauses

An added benefit of protecting your wealth in this way is that the articles can be set up to include specific clauses that protect the shares in specified circumstances.

These can prevent shares being transferred outside of the family by restricting shareholders to immediate family or family trusts.

As an example, the article could state that should a child divorce their spouse, that ex-spouse will not be able to retain shares in the FIC, meaning that the assets should not be included within any divorce settlement.

Please bear in mind. However, that should the case be brought in front of family courts, a judge may have the power to pass other assets disproportionately to ensure a “fair” divorce. However, control of the company is retained in the family.

Share Transfers

As previously explained, the value of these shares will fall outside of the parent’s estate for inheritance tax purposes seven years after the share has been “gifted” from the parents to the family member.  There are some Capital gains tax considerations to be aware of in transferring the value and rights of shares from parents to other family members so the transfers can be carefully planned to control the timing and value that is transferred and the tax implications for the family shareholders.

With this in mind, loans of cash or assets from the parents is a common way of funding FICs initially (and therefore establishing the value the company has available to invest). The parents often hold preference shares based on repayment of loans to the company and can withdraw funds tax-free.  This is because the repayment of capital at base value is not subject to income tax or capital gains tax.

For owners of large property portfolios, this can mean both a significant reduction in inheritance tax, capital gains tax and income tax.

Setting up these companies effectively requires close cooperation between tax planners, accountants, lawyers and financial planners. – A network that Bluebond has already built and utilised for many clients.

Call us today if you require help in this area

How can you pay
ZERO inheritance tax ?

FAQ

I already have my property portfolio in a Limited Company – Why should I set up an FIC?

Usually, if all the shares in the existing company are held by a person or a couple the current company can be converted into a Family Investment Company. The main benefits are retaining control with your family bloodline as spouses of your children cannot hold shares under the rules of an FIC. This is helpful to control the company in the event of a divorce of one of your children or grandchildren. Also setting up different classes of shares for your children and grandchildren to help with income tax issues is easier with an FIC as opposed to a typical Limited company.

I own my properties personally – Can I set up an FIC immediately.

Most people with significant property portfolios have high levels of Capital gains tax. When the company is set up the shares valuation is based on the property values at the time of purchase, but if the shares are passed to your children, the value is based on the current value of the properties and would therefore release a large CGT liability. To avoid this, you would typically set up a registered partnership and then use incorporation relief after 3 years to transfer the value into the company shares. This would not realize the CGT immediately. You can then slowly pass shares to the company using your annual CGT allowances to be offset against a directors loan account which can be withdrawn by you tax-free as required. If there is a large CGT issue because your property portfolio has grown significantly, then we would advise the setup of an Employee benefit trust to avoid this CGT liability.

Can I make my children directors of the FIC?

Most people make their children shareholders with different classes of shares. The future growth of the company value will reside in those shares, thus stopping the IHT problem getting worse. However, the directors are usually the people who originally owned the property portfolio as even after all capital shares are given away to avoid the IHT an income can still be paid to the directors for property management and directors duties. Most people also want to retain control of the dividends paid out, and so ordinarily adult children are not made directors until the death of the original directors.

What will be the costs of setting up an FIC?

From £5000 upwards depending on the complexity of the different classes of shares and the flexibility, you require within the articles of association of the new company and the number of properties transferred to the company. However, for people with large property portfolios over £2 million, the fees are insignificant compared to income tax, CGT and IHT savings that can be made.

Can people under 18 be shareholders?

This is not a sensible strategy due to the tax implication on parents of gifts to minor children. Once your children or grandchildren are over 18, they can be added as shareholders to the company. This can help reduce the income tax, and the CGT build up in the company by the use of more personal allowances.

Why do I need a specialist tax adviser to set up an FIC.

The vast majority of accountants have no experience of this type of work, and so experienced advice is essential to ensure that the setup and ongoing management is carried out correctly to make the best use of the tax advantages available

The information contained in this web site is for UK consumers only.  Like most firms of solicitors and accountants, Bluebond Tax Planning is not regulated by the FCA. The content of this website does not constitute FCA regulated financial advice and all content is provided for general information purposes only. Bluebond is not responsible for any action you may take as a result of information on this site. All advice will be delivered on a personal basis once we fully understand your situation and our client agreements have been signed.

Copyright © 2020 Bluebond.co.uk
-
Copyright Notice
-
Legal Disclaimer
-
Terms & Conditions
-
Privacy Policy