Family Investment Companies Traditionally parents and grandparents choose to pass on their wealth by putting money into a trust for their offspring. It is a way to ensure that their cash or other assets are held safely, and that only the trustees can access and/or distribute its contents, according to the terms of the trust. T rusts are a valuable and common way to pass on your money in a controlled way, whilst providing for income and minimising the chances that family members will fritter it away, or have to hand it over in the case of a divorce. However, there are some downsides to trusts, not least the complex tax rules that they are subject to. The income from the trust is subject to income tax, and a 6% inheritance tax charge applies every ten years on the value of the trust, plus a 20% tax charge to pay up-front if the initial cash transfer of the trust exceeds £325,000. The tax rates and allowances vary considerably according to the type of trust and how the trust’s beneficiaries stand to benefit from it. One alternative that is gaining in popularity is family investment companies (FICs). All the family own the shares in an FIC, with the parents (and/or grandparents) holding overall control and voting rights. The benefits of a conventional trust are mirrored in an FIC, but there are tax benefits, notably that income from the trust is subject to corporation tax of 19%, rather than higher rate income tax, and individual shareholders can receive up to £2000 of tax-free dividends each year. There is also tax relief paid on mortgages and transferring cash into an FIC is not subject to the up-front inheritance tax charge of 20% which many find prohibitive when setting up a trust which breaches the £325,000 threshold. There are also no limitations on the lifespan of an FIC, or the amount that can be invested, and they are considered to be an effective investment choice where funds exceed £1 million. It is therefore no surprise that FICs are a popular structure for investment planning for families, and we are seeing an increasing number of enquiries from our clients about them. However there are still some downsides, and it is worth noting that FICs are a complex investment structure that will have bespoke articles of association, and usually a shareholders’ agreement as well. There will still be professional fees to pay to set up and manage the FIC, and company accounts need to be prepared and taxes paid in accordance with HMRC regulations. If a property is put into the FIC rather than cash, there may well be capital gains tax to pay, and potentially stamp duty as well – so it is always advisable to get professional independent advice before embarking on setting up a family investment company. Finally it is important to point out that in April 2019 HMRC set up a specialist unit to examine the use of FICs as an inheritance tax planning vehicle. As of yet (summer 2023) there have been no major changes announced to the taxation regulations of FICs, but given the economic challenges currently facing the country, it is likely that tax amendments may be coming, especially in areas where HMRC may consider the current position to be overly generous. For more information on Family Investment Companies please get in touch with Graham Doubtfire, Private Client Tax Associate Partner, or one of the Personal Tax team who will be happy to talk through your options. Call 0330 058 6559 or email hello@scruttonbland.co.uk
1 0 | SCRUTTON BLAND | PRIVATE CLIENT
Made with FlippingBook Learn more on our blog