A recent freedom of information request to HMRC revealed that in 2020-2021 (the latest year for which data is available) 13,380 gifts from individuals “failed”, as the individual gifting had not survived the seven-year qualifying period.
Although the IHT rate can reduce (taper relief) if the gift, or cumulative gifts, are larger than £325,000 (no reduction for gifts smaller than £325,000), too many individuals had arguably left this until things were too late.
Our recent series of articles on IHT planning have looked at Flexible Lifetime Trusts , Loan Trusts and previous articles have covered Business Relief, Life Assurance and gifting options, but we shouldn’t ignore the option of Family Investment Companies (FIC).
What is a Family Investment Company (FIC) and is one right for you?
A FIC is a bespoke private company, often used as an alternative to family trusts. They are flexible, allowing family members to benefit through varying rights attached to shares (or the number of shares in issue).
Money is transferred (or lent) by you to the FIC, depending on your circumstances in return for shares. The FIC then makes investments based on advice from an investment manager such as Swindells Financial Planning.
The wealth can then be accumulated through the FIC or paid out to the shareholders in the form of dividends or a return of loan capital. It is an alternative to setting up trusts for the wider family’s benefit during your lifetime and can be more tax efficient than the tax rates applicable to trusts.
Who manages the FIC?
Often family members, so it can be a useful structure for parents / grandparents to retain control over assets, whilst accumulating wealth in a tax efficient environment and facilitating future succession planning.
Day to day control of the FIC rests with the board of directors, who are often the founders. The board determines what investments the company makes and when dividends are paid to shareholders.
What are the other benefits?
A FIC is useful from an Inheritance Tax (IHT) perspective as when the FIC is formed, shares can be given to family members without incurring any immediate tax charges and after seven years the full value of what has been given away will pass out of the estates of the founders, so avoiding any IHT.
It also means that for any money leant by the founders to the FIC that the growth on the funds lent will be outside of the founders’ estate for IHT purposes too.
A FIC may provide useful protection in the event of a shareholder’s divorce. The FIC can be structured so that shares can only be held by direct family members (therefore excluding spouses and civil partners). It can also be a way of ensuring family wealth passes through the generations rather than to spouses / civil partners.
A FIC is also a tax-efficient vehicle for accumulating wealth, particularly dividend income, which is received by the FIC tax free.
Other income and capital gains are subject to corporation tax at 25%, which is significantly lower than the top rates of tax for individuals and trustees (45% for savings income and 39.35% for dividend income).
Transfers to a FIC also avoid an immediate charge to Inheritance Tax of 20% which is applicable to trusts (depending on how much is transferred to the trust). FICs are also not subject to ongoing IHT charges which are applicable to trusts (currently up to 6% every ten years or exit charges when capital is distributed from the trust).
If let property is purchased via a FIC, currently mortgage interest can be offset against rental income.
Are there any disadvantages?
The set-up costs can be fairly significant, so we do not ordinarily recommend setting one up unless sums in excess of £1m cash (if you want to avoid capital gains tax) are available to establish the FIC. It can be complicated to extract capital without forward planning and professional advice.
An accountant’s involvement will be required to prepare company accounts and you may need advice to manage the investments owned by the FIC.
Are there any alternatives to a FIC?
Yes – outright gifts or trusts, some of which we have covered in previous articles. Outright gifts see you lose control of assets whereas trusts / FICs allows you to retain control.
Each person’s circumstances are different so although you may have £1m to invest in a FIC, alternative options may be more suitable, or a FIC may be the best route forward.
If you are seeking expert advice on a comprehensive Inheritance Tax planning strategy, please get in touch or complete the form below or give us a call on 01825 76 33 66 and we can discuss your own challenges and how best to address them.
Thanks to…
We are grateful to Amy Lane Thomson Snell & Passmore for her contributions to this article.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Please note that the Financial Conduct Authority (FCA) does not regulate some aspects of estate or tax planning or trust advice.
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