Trusts have for many years been the most popular way of passing wealth to future generations. However, in recent years a growing number of advisers have recommended family investment companies ("FICs") as a more tax efficient means of succession planning. There are many benefits in using a FIC in addition to tax advantages, namely familiarity and flexibility.
Many individuals are familiar with the operation of a private limited company. A FIC will typically be incorporated as a private company limited by shares with funding being provided by way of a loan or by cash through subscription for shares, however deciding which option is most suitable will depend largely on individual circumstances and will require professional tax advice.
A typical FIC structure which we have seen clients adopt involves the older generation (most commonly the parents) subscribing for a class of shares carrying the right to appoint directors and vote but not having any entitlement to dividends or a return of capital. The younger generation by contrast would receive a different class of shares which entitle them to dividends and a return of capital, but affords them no voting rights and therefore no say in how the FIC is to be run.
This structure has proved popular as it ensures the older generation, who will be transferring assets into the FIC, retain control of the vehicle by determining how the company is run, what assets it should acquire and how to apply any returns on the income that has been generated.
If a FIC is incorporated as a limited company, it will be required to comply with the same statutory requirements as set out by the Companies Act 2006, such as filing annual accounts at Companies House and maintaining statutory registers. Accordingly, FICs don't enjoy the same levels of privacy afforded to traditional trust arrangements.
At present, profits generated by a FIC are subject to corporation tax at a rate of 20%, which is expected to fall to 17% by 2020. The flexibility afforded by a FIC structure means that any income generated can be dividended to shareholders as and when required, bearing in mind each shareholder's personal tax circumstances such as their available personal allowance. However, unlike a trust, income generated will attract the double taxation of the FIC paying corporation tax and each recipient of dividends paying income tax.
In terms of succession planning, a gift of shares in a FIC is considered a potentially exempt transfer for IHT purposes and so if the individual gifting the shares (i.e. the parents or members of the older generation) survives for seven years after making the gift, no inheritance tax is due.
Furthermore, depending on the nature of the assets transferred into the FIC, there may be capital gains tax implications to consider.
FICs may be an appropriate means of succession planning where the focus is long term investment and there is a need to ensure appropriate control and protection of assets for the purposes of transferring wealth through generations. However, as with any form of tax planning, specialist advice should always be sought.
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Should you have any questions you would like to discuss in relation to the incorporation of a family investment company, please get in touch with a member of our team.