Head of Wills & Probate | Private Wealth | UK Succession and Tax
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A Family Investment Company (FICo) is an alternative vehicle for tax planning and moving assets through the generations, while retaining some control. In this guide we outline the key things to consider when taking this approach to your succession planning.
A FICo is a private company whose shareholders are family members. The share structure of the company is bespoke to suit the requirements of the family. As a company it will pay corporation tax and will need to file company accounts and the annual Confirmation Statement. The company will hold assets that could include a portfolio of stocks and shares, property or shares in family trading companies.
The type of shares that the company can issue include ordinary shares with differing rights, e.g. the right to vote, to receive dividends and to receive capital on winding up, preference shares and redeemable preference shares. These different rights and share types can be used to direct income to family members and to set out who controls the company. The rights are set out in the Company Articles of Association and in a Shareholders' Agreement. The day to day running of the Company will be carried out by the Directors and the powers of the Directors can be set out in the Shareholders' Agreement, as can their appointment and removal.
A FICo is useful for passing family wealth to the next generation and in getting them involved in a family business. Shareholders are entitled to attend an annual general meeting and if they have voting shares they are entitled to vote. Family members can be further involved by becoming Directors or employees of the Company. The Company can distribute income to the family e.g. by dividends, interest or a salary to employees and Directors. The Directors will have a choice over the timings of dividend payments, so wealth can be accumulated within the company or paid out to shareholders. A family investment company structure can also be used to protect asset value for the family via the Shareholders' Agreement which can have clauses on what happens to shares on a death or a divorce and there can be restrictions on the transfer of shares so that shares have to remain within the family.
It is easiest to set up a FICo as a newly incorporated company with cash injected into it via new shares or shares and loan capital. From the outset the share classes should have the rights required by the family to provide the income and control needed. Before the company acquires any assets, the share value will be equal to the nominal value paid for the share so they can be gifted to family members at this time with no capital gains tax liability arising. Once the shares have been gifted the cash can be used to buy assets. If some of the funding is via a loan this can be repaid to the lender over time without any tax charge. Interest can be charged on the loan which can provide an income to the lender and this will be subjected to income tax. If the family already has assets that they wish to transfer into the family company, there may be Capital Gains Tax and Stamp Duty Land Taxes to pay on such a transfer.
The gifting of the shares to family members is a potentially exempt transfer (PET) which means they pass out of your estate free of inheritance tax after you have survived 7 years from the date of the gift. If the company is being set up by a married couple, e.g. the parents, it is best if the new shares are allocated to both spouses and then gifted by them both rather than one spouse making all the gifts. After 7 years the shares will be free of Inheritance tax in the parents' estates. Over time the assets in the company will increase in value and this will be reflected in the value of the shares, therefore value will be growing in the hands of the next generation rather than accumulating in the parents' estates. Another consideration is that for IHT purposes shares are valued at their market value which is affected by the level of control that the shares give. A minority shareholding, which may not be easily sold, and which cannot demand that the Directors declare a dividend, will be less valuable than shares held by a controlling shareholder. Thus, the sum of the parts can often be less than the value of the whole company when being valued for IHT purposes. Shares held by spouses are considered together when looking at discounting the value of minority holdings.
The family may also wish to have a family trust owning shares in the company. The Trust could be set up by the parents as Settlors with their adult children and families as the beneficiaries. Gifts of shares to the Trust will be a chargeable event for IHT purposes but if the value of the gifts are below the personal nil rate band there will not be any tax to pay. Therefore, each parent could currently gift up to £325k each into the Trust free of IHT. The parents could be the Trustees and as such would be able to use the Trust's shares to supplement their votes to retain control of the company. After 7 years from the gift into the trust the IHT nil rate bands re-set and are again available.
As a company, a Family Investment Company is subject to corporation tax on its income and capital gains. The current rate of corporation tax is 19%. Dividends received by a company from other UK companies are mainly exempt from corporation tax therefore income from a share portfolio will not be taxed. Dividends paid to beneficiaries over the tax-free allowance of £2,000 will be taxed at the dividend rates of 7.5%, 32.5% and 38.1% depending on the individual's other income. A company gives the Shareholders the choice over the timings of thepayment of dividends however the downside of a company is the tax that may be payable if a company is wound up and the capital value is returned to the shareholders.
Care also needs to be taken if there are changes in the share structure of an existing company, particularly if there is a new issue of shares that diminishes the value of the existing shareholdings. This could be caught as a chargeable transfer for inheritance tax purposes. Also, there is legislation in place that catches the shift of income streams from a higher rate taxpayer to a lower rate taxpayer whilst the transferor retains a benefit in the underlaying income generating asset. A gift of preference shares could be caught by this legislation if they only have a right to income.
Whatever your circumstances we can guide you through the entire process, from rules about income tax and tax rates to helping you choose the right structure for you and your family and the company set up. We can then continue to help you run the company over the years to help ensure you achieve your goals and overcome any roadblocks along the way.
Get in touch with one of our team below to find more.