Family Investment Companies (“FICs”) offer a great structure through which people can pass on wealth while maintaining control of assets in a tax efficient way.
What are they?
FICs are private limited companies whose shareholders are family members, with the parents typically named as directors. The structure can enable parents to keep control over assets, while growing wealth and facilitating tax-efficient succession planning.
How do they work?
Typically, you would fund the FIC initially either by transfer of assets or by loan. You would also usually become a director of the FIC, which would give you control over investment decisions and when any dividends are paid to shareholders.
Normally the children are allocated non-voting shares, and the parents take voting shares to ensure control over the company at shareholder and board level. Each child can be given a separate class of shares to enable a flexible approach to payment of dividends – these are sometimes called “Alphabet shares” as they are often named class A,B,C etc. As each child has a different class of shares, every year the directors can decide what type of dividend they pay to each class of shares – that may mean that every child receives the same or it may mean that the directors can choose to pay different amounts of dividends to each child based upon their particular requirements.
Distributions are made to the shareholders, generally, through dividend payments.
How are they funded?
Quite often cash is placed into the FIC in return for shares. You can also gift money to your children and ask them to subscribe for shares, so they receive them as a gift. Typically the most favoured option is to lend money to FIC – in essence, sharing the growth of the FIC with the shareholders, but retaining access to the original amount that has been put in. Money that is lent to the FIC can be drawn down through the loan instrument over time, tax free. However this does negate one of the primary benefits of using a FIC – to take the value out of your estate for IHT purposes – as the value of the loan will still be considered part of your estate. The benefit of the loan can however, be gifted to the children as you decide, which will start the seven year clock ticking.
The use of preference shares is also an alternative way of structuring the shareholdings, which are redeemable when the FIC is set up. These shares do not require distributable returns and are generally treated as a capital gain tax position for the shareholder which may be quite small.
What are the tax implications of a FIC?
In addition to the potential IHT mitigation, FICs can provide a tax efficient environment for the proceeds of your investments.
As a general rule, the FIC is subject to corporation tax on its profits instead of the usual charges to personal tax. However, the majority of dividends received by a FIC are exempt from the charge to corporation tax and so it can be an excellent vehicle for high yield assets, where profits are retained in the structure and re-invested.
Shareholders pay tax on dividends they receive at their marginal income tax rate. From April 2022, dividend tax rates are increasing by 1.25% setting the rate at 8.75% for basic rate tax payers, 33.75% for higher rate tax payers and 39.35% for those paying additional rates. If a shareholder has no other income they would benefit from their personal allowance of £12,570 per year. The additional dividend tax allowance of £2,000 also applies after this personal allowance has been used.
You may decide to pay a director a salary out of the company which would be taxed as income in their hands.
One of the main things to watch out for when setting up the FIC is to ensure that you are aware that for parents paying dividends to their children, those dividends will be taxed at the parent’s income tax rate until the children reach the age of 18. If there is a non-working parent this is less of a problem. If the children decide to go to university then the FIC is an excellent vehicle to pay dividends to them to enable them to pay for their own tuition fees and maintenance in a tax efficient manner.
How do you realise the value within the FIC?
If one of the shareholders wants to extract their capital value from the FIC, this can be done through a company buyback of their shares. It is advisable to approach HMRC for clearance to make sure that the buyback value will be treated as capital value rather than income distribution to lower the tax liability. It may well be that you have already opted to pay the capital gains tax on transfer of the asset (particularly shares) into the FIC in the first place.
How do you set up a FIC?
Simply contact us at arch.law. We will talk through the suitability of the FIC with you, establish the company, draft a bespoke shareholders’ agreement and ensure that the shares are allocated accordingly.
