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Family investment companies
Structure and tax benefits
The UK currently has one of the lowest rates of corporation tax in any of the
G7 countries. With rates set to fall further to 18%, using a company as an
investment ‘wrapper’ is becoming a popular concept for investors.
A Family Investment Company (FIC) is a
company that invests rather than trades.
The investments are usually equity portfolios
or, in an increasing number of cases,
property. There is in fact no restriction on
the asset class that a FIC can invest in.
The FIC is funded by the founder transferring
cash or assets usually by way of a loan. Any
profits arising from the investments are taxed
at corporation tax rates rather than income
or capital gains. This can create a tax saving
of up to 25% for an individual paying tax at
additional rates. Additionally, on an equity
portfolio, dividends can be received by a
limited company free from tax creating an
even larger tax saving. The FIC therefore
offers a structure whereby the investments
can grow in a low or zero tax environment.
The structure also offers Inheritance Tax (IHT)
advantages and is becoming an attractive and
flexible alternative to a trust, particularly with
entrepreneurial clients who are more familiar
and comfortable with a company structure.
Structure
Usually a FIC is set up with a founder share
held by the individual providing the capital,
with other family members brought in as
shareholders. Different classes of share
are often issued to enable flexibility around
payment of dividends. It is also possible
to create redeemable preference shares to
extract capital with minimal, if any, tax cost.
The founder shareholder generally maintains
control over the company (or is responsible
for appointing an advisor) and the payment of
dividends. The Articles of Association and the
shareholders agreement can be drafted to protect
the shares from sale outside of the family.
Tax drivers
Income tax
The FIC is usually funded by way of a loan and
can be repaid from profits tax-free. There can
be issues with settlements legislation where
loans are involved, although assigning part
of the loan to the other shareholders should
reduce any risk of challenge by HMRC.
The company shelters the investments from
income tax until the funds are extracted from the
company. When profits are extracted, other than
by repayment of the loan, the shareholders will
be liable to income tax on any amounts received.
Payments are usually made by way of dividend
and from April 2016 will be subject to rates in
the hands of the recipient as outlined below.
Income band Tax rate
0-£5,000 (dividend income only) 0%
£5,001-£32,000 7.5%
£32,001-£150,000 32.5%
Over £150,001 38.1%
 Crowe Clark Whitehill
The FIC is created to benefit the family and,
as such, parents and children are generally
included as shareholders. It is also possible
and can be beneficial to include a trust as
a shareholder to offer more flexibility.
Dividends paid to minor children are taxed on
the parents, where they are the source of the
underlying capital. However, for children over
18, payment of a dividend up to the basic rate
band can be a very efficient way of extracting
funds to help with costs such as university fees.
It is not generally beneficial to pay dividends
to the founder shareholders as their income
levels are usually high. The combined tax rate
of the company and the income tax would
be higher than if the asset was held directly.
The FIC structure is of most benefit where the
capital and income can be retained within the
company for long periods, or indeed used as
a structure to pass on to the next generation
in the same way one would use a trust.
Capital Gains Tax
Any assets sold within the company would
be charged at corporation tax rates rather
than Capital Gains Tax (CGT), 20% tax
compared with 28% CGT. Companies
still have the benefit of indexation which
is no longer available to individuals.
Start the conversation
London
Tim Norkett
Head of Private Clients
+44 (0)20 7842 7151
tim.norkett@crowecw.co.uk
Cheltenham
Sue Daye
+44 (0)1242 234421
sue.daye@crowecw.co.uk
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www.croweclarkwhitehill.co.uk
Crowe Clark Whitehill LLP is a member of Crowe Horwath International, a Swiss verein (Crowe Horwath). Each member firm of Crowe Horwath is a separate and independent legal entity. Crowe Clark
Whitehill LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath or any other member of Crowe Horwath and specifically disclaim any and all responsibility or
liability for acts or omissions of Crowe Horwath or any other Crowe Horwath member. This material is for informational purposes only and should not be construed as financial or legal advice. Please
seek guidance specific to your organisation from qualified advisors in your jurisdiction.
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Profits on gains arising would be extracted
in the same way as outlined above.
On the sale or liquidation of the company the
shareholders would be charged to CGT on the
proceeds received less any cost. As shares are
likely to be subscribed for at par, CGT will be
charged on the whole increase in value at 28%.
Inheritance tax
One of the main advantages to an FIC are
the IHT benefits. Not only is value passed
to the other shareholders on the creation
of the company (subject to the seven year
survivorship rule) but any increase in value of
the investments arises outside of the estate
of the original founder. Additional shares can
be transferred at a later date, possibly to a
trust structure. As the value of the founder’s
shareholding diminishes so the value of the
other shareholder’s portion increases, therefore
reducing the IHT exposure in the estate further.
How can we help?
There is no ‘one size fits all’ to planning a FIC.
There are considerable savings to be made
where the structure is appropriate, and we can
help develop the best plan for you and your
family. As with any tax planning there are risks,
for example HMRC could change the rate of
tax on investments. We recommend you seek
professional advice before any action is taken.
Kent London Mayfair Thames Valley
Simon Warne Tom Elliott Mark Stemp
+44 (0)1622 767676 +44 (0)20 7842 7372 +44 (0)118 959 7222
simon.warne@crowecw.co.uk tom.elliott@crowecw.co.uk mark.stemp@crowecw.co.uk
Manchester Midlands
Rebecca Durrant Joe Hancox
+44 (0)161 214 7500 +441 (0)121 543 1900
rebecca.durrant@crowecw.co.uk joe.hancox@crowecw.co.uk