Many business owners may be looking for tax-efficient ways to pass on funds to their children, simply and effectively. If, for example, a family company has been sold, with a sum of money ready to be passed on to children and grandchildren, then setting up a Family Investment Company may be a sensible way to proceed.
What is a Family Investment Company? 
A Family Investment Company (FIC) is a normal company, whose shareholders are family members. The shareholdings in the company can be structured to enable parents to retain control of the company, while growing wealth outside of their estates to pass this down through the generations.
FICs would normally see money for grandchildren and children paid into the company and typically invested in a portfolio of stocks and shares.
How to set up a FIC?
The FIC will typically be a newly incorporated company, enabling shares to be allocated to family members before there is any value in the company. This avoids any Capital Gains Tax liability arising on the allocation of shares between family members.
The funds available can be paid in as a gift or as a loan, or a mixture of the two. Loans can be repaid to the person putting the money into the FIC over time, without any tax charge on the individual. If the money is lent to the company then the growth on that loan can be removed from the estate while still giving the person tax-free access to the original cash.
What is the Inheritance Tax position?
There are no IHT liabilities arising from putting money into the FIC. If the money is gifted to the company, this will be a potentially exempt transfer (PET) which will fall out of the donor’s estate after seven years.
What about Corporation Tax?
The Family Investment Company will be liable to Corporation Tax on the income and gains that it generates from its activities. The current rate of Corporation Tax is 19%. However, most dividends received by companies are exempt from Corporation Tax, so if an FIC invests heavily in shares, any dividends paid on those shares are likely to be tax free in the company.
How do the next generation (being the shareholders of the FIC) get the money out?
Individual shareholders are liable to Income Tax on monies that they withdraw from the company. If a shareholder has no other income, the optimum structure is to take a salary equal to the personal allowance, with the balance of monies taken from the company in the form of dividends. The company benefits from Corporation Tax relief on the salary and the individual pays no Income Tax. The first £2,000 of dividend income in excess of any unused personal allowance is taxed on an individual at 0%, the next £35,500 is taxed at 7.5% and then at 32.5% until total income exceeds £150,000. Any dividends in excess of £150,000 are taxed at 38.1%.
Conclusion
FICs are much simpler to set up and manage than trusts but serve a similar purpose. They are also more tax efficient, as they can be set up so that income is only taxed when it is withdrawn rather than when the income arises.
Also, they do not have IHT liabilities arising under the 10-year charge or have IHT exit charges that apply to trusts.
If this is something you would like to discuss further, please get in touch with us at hwca.com and our advisors can talk you through the right options for you.
