Several families want to pass on assets and wealth to their children but don’t want them to have access to these at an early stage in their lives. Normally, trusts are a favoured choice.
However, setting up a trust comes with its complexities and they are not always tax efficient. A family investment company is a popular alternative to protect family-owned wealth and create a strategy for both tax and succession planning and inheritance planning.
This blog tells you everything that you need to know about family investment companies, how to create one, and its benefits.
What is a family investment company?
A family investment company can be defined as a private limited company created by the members of a family. The main purpose of setting up this company is to manage and grow the family’s wealth and eventually pass it on to other family members the next generations.
Like any other company in the UK, family investment companies are governed by the regulations of the Companies Act 2006. It is incorporated through the regular procedures at the Companies House (the United Kingdom’s registrar of companies).
What is a family investment company and how does it compare to a discretionary trust solution?
Family investment companies are an alternative method of inheritance tax planning. Family investment companies (FICs) are indeed a viable option for inheritance tax planning.
These companies allow families to consolidate their assets and investments, more tax efficient accumulation while also providing a framework for passing on wealth to future generations.
FICs are typically structured as private limited companies and are controlled by family members who act as directors and shareholders.
By transferring assets into the FIC, they are removed from an individual’s estate, reducing the potential inheritance tax liability.
Furthermore, FICs offer flexibility in terms of managing and distributing wealth, as well as potential tax advantages.
However, establishing and running a FIC requires careful consideration of legal and other tax consequences and implications, and it is advisable to seek professional advice.
What is the structure of a family investment company?
A family investment company does not trade in goods and services. Instead, it allows only investments in properties, investments, cash, or portfolios.
A family investment company is a type of private company, that focuses its activities solely on investments rather than engaging in direct trading of goods or services.
In this particular case, the company allows individuals to invest in properties, investments, cash, or portfolios. This means that individuals can allocate their funds towards various investment opportunities such as real estate properties, financial instruments, cash holdings, or diversified portfolios.
By specializing in these specific investment options, the family investment company aims to provide individuals with a platform to grow their wealth and diversify their investment portfolios. This approach allows investors to benefit from potential returns, capital growth and income generated by these investment assets.
The founders of this company are usually parents who wish to pass on inheritance to their children. This company has a unique structure that allows ownership to be separated from the management and control of the company.
Here’s how a family investment company is managed:
The directors of the company have the right to vote at general meetings and appoint one director.
While the children have no voting rights or any other kind of control over the company, they gave complete entitlement to the returns on the capital, annual profits or dividends paid.
The structure of a family investment company is flexible and can be tweaked to meet every family’s requirements.
A family investment company, just like all other companies in the UK, have governing documents such as articles of association and shareholder’s agreements. These documents allow the company to:
- Regulate which family members can make decisions.
- What is the future course of action in the event of the death of a shareholder?
- How profits will be distributed amongst the shareholders.
- How will the capital be used pay dividends returned and shares be transferred?
- The procedure for the director’s appointment.
How are the funds managed in a family investment company?
Once the structure of a family investment company is set, the next step is to provide the funds.
These funds may be provided by the parents in the form of:
Gifting the assets, which usually comprise investments, property, or cash. In case property or shares are transferred, land transaction and corporation tax rate or stamp duty on the shares will be paid respectively.
In case the parents wish to bestow assets consisting only of cash, they can be loaned to the company. This allows the founders to take cash from the company through loan repayment instead of dividend payment. Since loan repayment is not subject immediate tax consequences due to taxation, it provides the holder of the loan with an income.
What else is required to set up a family investment company?
Once these critical elements are decided, the founders then need to follow the regular company formation process that any limited or unlimited company follows in the UK.
These include:
- The company’s name.
- One Standard Industrial Classification (SIC) code. (Up to 4 codes can be chosen)
- The registered UK address of the company.
- Information about the directors. This should include their names, work addresses, residential addresses, occupations, dates of birth, and nationalities.
- Information about the shareholders. This includes their names, address, and the class and value of the voting shares that they will hold.
The memorandum and articles of association.
Which taxes apply to a family investment company?
Here are the different taxes that apply to a family investment company:
- Inheritance tax: A family investment company set in accordance with the provisions of the companies act will not attract any inheritance tax (IHT).
- Corporation tax: In the context of a family investment companies, corporation tax is payable on any profits. The dividend income received by this company is corporation tax-free. However, when cash is withdrawn from the company, it may attract double taxation (corporation tax and income tax)
- Income tax: Salaries paid to the directors to manage the investments, properties, and cash attract income tax.
- Capital gains: If the family investment company makes any capital gains, they attract corporation tax.
Why should you consider creating a family investment company?
More and more families are choosing to set up family investment companies over trusts. This is mainly due to the clear benefits and efficiencies that these family wealth companies allow including:
- Family investment companies are much more tax-efficient. For instance, profits from investment are subject only to corporation tax. This is much lower than the prevailing income tax rates.
- The company doesn’t have to pay any inheritance tax charges upfront.
- The founders have full control over how to manage their wealth and investment decisions.
- Family investment companies has a flexible structure. This helps protect the assets in eventualities such as divorce, death of any of the founding members or the beneficiary members, transfer of some assets, minors, etc.
Corporation Tax on a family investment companies
If a company makes over £250,000 a year, it will be taxed from 2023 on profits. In the case of SMEs, the low profit rate for the past five years will be 18%. For companies whose revenues range from £150,000 to £250,000 there may be marginal tax relief provisions that can be used as bridges to a wide gap in the rates.
Inheritance Tax on family investment companies
Generally the FIC can help with inheritance tax in many ways, as long as the parent has a regular seven year period. However care is required as the seven years’ condition on IHT has been reviewed for a few years and could possibly change.
The Family Investment Company (FIC) can indeed provide various benefits when it comes to inheritance tax (IHT), as long as there is a consistent seven-year timeframe in place.
By transferring assets into an FIC, parents can potentially reduce the IHT liability on their estate. However, it is crucial to exercise caution as the conditions surrounding IHT have been under review for some time now and may undergo changes in the future.
Therefore, it is advisable to seek professional guidance to ensure compliance with the current regulations and to effectively manage any potential alterations that might arise.
Further tax considerations
If clients subscribe to shares of a corporation, they are usually not transferring the value for IHT purposes. It will never lose value if the money in the account was sold for shares with the same value.
Can a person give a lump sum to a trustee? All gifts to discretionary trusts are classified as a lifetime transfer chargeable (CLT).
When establishing a trust, the settler is obligated to include any previously deposited gift or remit in the trust in the preceding seven year period. The entry fee for any customer that exceeds its nominal rate of return is non-refundable.
Capital gains tax and FICs
The proper preparation will reduce capital gains taxes in the creation of the FIC. It is also liable for corporation tax relief if a company’s assets are sold or otherwise dismantled. The Company provided indexing allowances for asset holdings prior to January 2018.
Subsubstantial shareholding exemptions can be used for inheritance tax purposes, exempting gains from trading subsidiaries, however complex conditions are applicable.
Examples of Family Investment Companies for Wealth Management
Understanding the application of FDICs is essential for efficient financial management. Following are real-world examples demonstrating how a FIC could be used to efficiently manage assets. Example 1 Example 2.
Let’s imagine that you have over £10million in cash and other assets. Despite the young age, the couple had no desire to take the money immediately.
Withholding tax on overseas dividends
Dividend and interest earned abroad are eligible for withholding taxes. The rate of withholding taxes may be lower under the conditions of the corporation tax deduction under the relevant double tax agreement. In some situations companies benefit from the treatable withholding tax rates compared with individuals.
In some instances withholding is offset from corporate income to pay corporation tax in the UK. In other instances withholding is offset. The taxation of income is not subject to the UK corporation tax.
Summing Up
If you are considering setting up a family investment companies in the UK, you will have to determine your structure and investments. Besides this, you will have to abide by the legalities, drafting of important documents, and tax structures.
We offer specialist advice in all these respects, ensuring that your family investment company meets all the regulatory aspects, while helping protect your assets for the future generations. Get in touch with us today to know more Or you can call us on 03300 575 902
Frequently Asked Questions (FAQs)
What is a family investment company (FIC)?
A family investment company (FIC) is a legal entity that is set up to manage and hold the assets and investments of a family. It provides a structured approach to wealth management, tax planning, and inheritance planning.
How does a family investment company work?
A family investment company works by transferring family assets, such as property, investments, and cash, into a separate company structure. The family members become shareholders of the company, and the company’s board of directors manages the assets on behalf of the shareholders.
What are the benefits of setting up a family investment company?
Setting up a family investment company offers several benefits, including tax efficiency, asset protection, centralized management of family wealth, flexibility in distributing income, and succession planning.
How can a family investment company help with tax planning?
A family investment company can be used for tax planning by allowing income and gains to be distributed among family members in a tax-efficient manner. It can also help to minimize inheritance tax liability by facilitating the transfer of wealth to the next generation.
What is the process of setting up a family investment company?
The process of setting up a family investment company involves creating a legal entity, drafting a company constitution, appointing directors, and transferring assets into the company. Professional advice from legal and financial experts is essential to ensure compliance with regulations and tax laws.
Who can benefit from a family investment company?
A family investment company can benefit high-net-worth families seeking to protect and manage their wealth, as well as those interested in long-term tax planning, succession planning, and inheritance planning for future generations. Professional guidance should be sought to determine if a family investment company is the right fit for individual family circumstances.
