A family investment company (“FIC”) is a company established to help pass wealth to the next generation while enabling the founders to continue to exercise control over the assets.
Business as usual
In April 2019, HMRC established a dedicated team to review the use of FICs, to better understand the profile of those establishing them, and investigate the areas of tax risk associated with them and if there was any correlation between those who operated FICs and non-compliant behaviours.
Finding no evidence that those using FICs were more inclined toward avoidance. HMRC has concluded that there was no correlation between establishing a FIC and non-compliant behaviour.
Following the conclusion of the review, the FIC team has been absorbed into the wider Wealthy and Mid-Size Business team and going forward FICs will be looked at as “business as usual” rather than by a dedicated team.
The conclusion of HMRC’s review that FICs are not associated with avoidance is welcome.
It is worth noting that the review does not make any statement about potential future changes to the taxation of FICs, for example where they are used to roll up investment returns at lower corporation tax rates. For now, FICs will continue to be an attractive option for those wishing to pass on wealth to the next generation while still exercising control.
What is a family investment company?
The FIC is run by its directors, often the founder, with the shares held by family members and/or trusts.
FICs have become a staple of inheritance tax and estate planning since the mid-2000s when changes to the taxation of trusts meant that transferring cash and most investment assets into trust would crystallise an immediate 20% inheritance tax charge.
FICs seek to mirror some of the benefits of trusts for managing and passing on wealth such as flexibility and the separation between ownership and control but without giving rise to an immediate charge to inheritance tax.
FICs are most useful when considered long-term structures for the protection of family wealth and as part of a strategy to pass that wealth to the next generation. There are however important tax benefits too.
The FIC will pay corporation tax, currently 19%, on its profits, rather than income tax which can be charged at up to 45%. However, typically dividends received by a FIC will be exempt from corporation tax.
Interest costs and management expenses will be deductible in calculating the profits for corporation tax while they would not be deductible for an individual or trust.
Income tax on the extraction of profits
Further tax liabilities may arise when profits are extracted from the FIC. For example, based on the current corporation tax rate of 19%, and income tax of 38.1% income tax on dividends for additional rate taxpayers, the effective rate of tax on the profits if extracted is 49.5%.
A FIC will be particularly efficient if the profits do not need to be extracted regularly and instead can be “rolled up” within the FIC. Typically, however, a FIC will be funded primarily by way of shareholder loans from the founder shareholders and only after these loans have been repaid to them will the founders need to suffer any personal tax liabilities on the extraction of profits from the FICs.
FICs may also provide inheritance tax benefits. If structured correctly, future growth in value of the assets held by the FIC may be outside the estate of the founder while if share ownership is spread between family members and trusts the shares owned by each member of the family or trust may be discounted to reflect their minority stakes thereby reducing potential inheritance tax liabilities.
If you would like to discuss setting up a FIC, please contact us.