This is why you should consider the benefits of family investment companies
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As part of our week-long focus on family businesses, John McCaffery, Tax Partner and Head of Tax at chartered accountants and tax advisors Alexander & Co explains the uses of family investment companies, which have become a popular vehicle to transfer wealth in family businesses between generations.
Whilst not everyone is aware of these structures and their tax benefits, family investment companies have recently made the headlines as HMRC has recently concluded that there is no evidence that the use of family investment companies was being abused.
This is good news for anyone currently using a family investment company or considering doing so and paves the way for their continued uses as part of a wider tax strategy for families.
What constitutes a family investment company?
A Family Investment Company (FIC) is a private company which holds and manages investments, such as property, bonds or stocks with the shareholders being family members. These can be used as an alternative to or in conjunction with trusts to transfer wealth between family members in a tax efficient manner.
They have gained popularity as an alternative to trusts, in part following tax changes affecting the efficiency of using trusts for wealth planning that were first introduced in 2006. Within a trust, most assets are subject to an immediate inheritance tax charge of 20%, coupled with additional charges levied every 10 years. These are in addition to charge that are applied when assets are transferred out of a trust and high rates of tax on income and gains made within the trust.
The HMRC investigation into family investment companies
HMRC set up a special team to investigate family investment companies in 2019. HMRC frequently do this, especially in areas of growing interest and increased activity. The team investigating family investment companies was disbanded earlier this year, concluding that it found no evidence that that their use was being abused.
Benefits of a family investment company
One of the overriding benefits is that family investment companies provide full control over investment decisions and they can offer tax efficiencies in preserving wealth for future generations.
The structure of these companies provides significant flexibility in how income, initial capital and capital payments are spilt between the holders of various classes of shares. This can provide significant advantages over trust arrangements. They can also be used as part of an inheritance tax mitigation strategy.
Within a FIC, profits from investments are subject to corporation tax, rather than higher personal income tax.
Even with the proposed 19% to 25% increase in Corporation Tax in April 2023, this can still offer substantial savings, compared to the higher rates of income tax at 40% and 45%.
Personal circumstances will always determine whether a family investment company is the best way to protect family wealth for future generations, and it is advised that professional advice is sought.
How Corporation Tax, Stamp Duty Land Tax, Inheritance Tax and Capital Gains Tax are treated and apply within the business structure will need considering.
When initially setting up a FIC, consideration will also need to be given as to how it is managed with regards to the death of the founder(s), divorce of the founder(s) and junior members, how minors are treated within the structure, how to add new family members and how to extract income personally form the company.
Overall family investment companies offer an efficient way to pass wealth through generations of a family in a tax efficient way and for family businesses, should be considered as part of a wider tax mitigation strategy.