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    PLANNING FOR INHERITANCE – FAMILY INVESTMENT COMPANIES

    No one likes talking about death. But if you have children it’s worth looking at how best to pass on any money or assets to them. Take a look at our guide to family investment companies. It’ll help you decide if it’s the right option for you.

    WHAT IS A FAMILY INVESTMENT COMPANY (FIC)?

    It is a privately owned company that is controlled and run by its Directors. The Directors of the FIC are usually the parents, and the shareholders are usually the children (or other family members).

    This ensures that the day-to-day control of the business, investment and profit distribution decisions remain with the parents and the children benefit from distributions.

    It is an efficient way of transferring value to family members whilst retaining some control.

    SOUNDS GREAT! HOW DOES IT WORK?

    The Articles and provisions of the company can be tailored to suit your specific family needs, outlining rules for profit distributions, capital return, share transfers and the appointment of directors.

    Usually, the future growth within the company would be distributed to the children.

    AS A PARENT, HOW DO I KEEP CONTROL?

    By subscribing for shares with voting rights.

    IF MY CHILDREN ARE ALSO SHAREHOLDERS, HOW DO THEY RECEIVE DISTRIBUTIONS BUT NOT HAVE CONTROL?

    You would gift non-voting shares to your children or you could gift them cash to subscribe for (or buy) non-voting shares in the company.

    Alternatively, you could settle these non-voting shares into a Trust for the benefit of the children if you feel that direct receipt of the distributions isn’t appropriate at the current time.

    WHAT IF MY CHILD DECIDES TO SELL THEIR SHARES AND I DON’T WANT THE SHARES LEAVING THE FAMILY?

    You can stipulate in the Articles who can and cannot hold shares, for example; bloodline family members, spouses or for the shares to be returned to the company.

    HOW DO I GET MONEY OR ASSETS INTO THE FIC?

    You can fund the FIC directly – by transferring assets to the company, or you could loan the company the assets, however a loan would not remove the asset from your estate for inheritance tax purposes.

    If you transfer/gift non-cash assets into your FIC, you will trigger a capital gains tax charge on the basis that you are disposing of the asset. You will be entitled to use your CGT annual exemption against the gain (calculated by market value less acquisition costs) provided it hasn’t already been utilised by other disposals.

    If you loan the assets or cash, you could potentially redeem the loan at a later date, if required. If you make a loan to the company, the company could pay you interest at the market rate on the amount that it has borrowed. This would return some income to yourself, but would be taxable on you personally as interest received at the savings rate. Repayments of capital would not be taxable.

    HOW DOES A FIC SAVE TAX?

    By holding assets within a FIC, rather than personally, you bring that income in to the corporation tax regime and out of the income tax regime.

    A company pays 19% tax on its profits, whereas an individual who is a higher rate taxpayer will pay 40% or 45%.

    Companies generally do not pay tax on dividends received.

    Management and business expenses incurred by a company can be offset against the company profits, reducing the amount chargeable to tax. Individuals are unable to offset these expenses against their personal income.

    If you extract cash – pay a dividend – then the recipient will be taxed on that dividend under the income tax regime.

    IS THERE AN ADVANTAGE OF PUTTING ASSETS INTO A FIC RATHER THAN A TRUST?

    In most cases, a gift to a trust in excess of £325,000 will incur a lifetime IHT charge of 20%.

    A gift into a FIC would be potentially exempt transfer, meaning that if the parent survives for 7 years after making the gift, no inheritance tax will be due. There is a taper structure should the parent not survive the full 7 years.

    BENEFITS

    • Takes advantage of the lower corporation tax rates
    • Companies do not pay tax on dividends received, so a dividend of £10,000 can be fully reinvested within the company. A £10,000 dividend received by an individual would suffer £3,810 tax deducted before the individual could reinvest
    • Management and administration fees can be deducted against company profits
    • Straightforward company structure
    • Parents retain control
    • Control can be passed to children at a later date, if desired
    • Can protect assets in case of family breakdown (further advice may be required if this is your intention)
    • Dividends can potentially be paid tax-free up to £14,570 (where no other income is received)
    • Reduces the parents’ taxable estate for inheritance tax purposes, whilst retaining control

    DRAWBACKS

    • Can be inefficient if all income earned within the company is required to be paid out immediately
    • Administration costs of setting up and running a company
    • The law can change, and the corporation tax rates may increase

    FIC v TRUSTS. AN OVERVIEW

    For more details, take a look at our ‘at a glance’ FIC v TRUSTS overview.

    AUTHOR

    Gemma Dobson, Personal Tax Senior Manager

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