John McCaffery, Tax Partner and Head of Tax at Alexander & Co (one of Manchester’s leading accountancy firms), outlines the benefits of family investment companies, which are becoming a useful mechanism to reassign family wealth.
Whilst not everyone is familiar with these structures and their benefits, family investment companies have made the news in recent months as HMRC concluded that there is no evidence that the use of family investment companies are being abused.
This is welcome news for anyone presently using a family investment company or considering doing so and paves the way for their use as part of a wider tax planning strategy for families.
How do they work?
A Family investment company (FIC) is a private company which holds and manages investments, which could be property, bonds or stocks with the shareholders being family members. These can be used as a different structure to, or in combination with trusts to move wealth between family members in a tax effective manner.
Family investment companies have become popular as an alternative to utilising trusts. This is partly due to tax changes that have altered the effectiveness of using trusts for wealth planning. These changes were introduced in 2006. When used alongside trust structures, they both work effectively together as part of any overall tax planning strategy.
What are the benefits?
One of the most prominent benefits of a family investment company is that that they can give full control over investment decisions, and they can provide tax efficiencies in the preservation of wealth for any future generations.
The structure of family investment companies can provide many options in how initial capital, capital payments and income are divided between the holders of the different classes of shares within the company. This can offer significant benefits over trust arrangements. They are also useful as part of a mitigation strategy for inheritance tax.
Within a family investment company, gains generated from investments are subject to corporation tax (as opposed to income tax). Even with the proposed increase in Corporation Tax to 25% in April 2023, this can still provide significant savings, compared to the higher rates of income tax of 40% and 45%.
A review carried out by HMRC
HMRC set up a special taskforce to investigate the use of family investment companies in 2019. The government organisation regularly undertakes such work, especially in areas where there is growing interest and activity increases.
The team examining the use of family investment companies was disbanded in 2021, concluding that no evidence came to light that that their use was being abused.
Other points to consider
- An individual’s own circumstances will always determine whether a family investment company is the most suitable method to protect family wealth.
- Consideration as to the implications of inheritance tax, capital gains tax, stamp duty land tax and corporation tax within the business structure is also required.
- In both these regards, professional advice from a chartered tax advisor is strongly advised.
- When establishing a family investment company, the death and/or divorce of the founder(s) and the junior members, alongside how minors within the company are considered in the overall structure, will need careful planning.
- Thought will also need to be given as to how new family members are added to the company structure and how to extract funds personally from it.
- Family investment companies can provide an effective structure to pass wealth between generations of a family in a tax effective way and, for family businesses, as part of a wider tax planning strategy.
This blog is intended as an informative piece and does not construe advice. If you have any further questions or would like to discuss your tax planning needs, please don’t hesitate to get in touch with us using the form below or by reaching out to your usual Equilibrium contact.