Setting up a Family Investment Company will allow you to place cash or assets into that company, and pass on your wealth free of inheritance tax (after 7 years). This also means you retain control over the assets during your lifetime.

Companies also offer a more effective tax environment for growth assets than holding them personally. This is especially true for rented property. Therefore, this is often a method recommended to our clients who have significant property portfolios.

As you will be Director and a preferential Shareholder, you will have all voting rights and therefore control over the capital held in the FIC.

It is important to understand that this will not give you rights to the capital itself, as often the capital value will be gifted away to your children as an outright gift.

This means that after seven years, the value of the money or property transferred into the FIC will fall outside of your Estate for inheritance tax purposes, so long as you keep no beneficial interest in the company.

However, as a director of the company you retain control of the income from the assets of the Company.

• One of the main advantages of a Family Investment Company (FIC) over a Lifetime Discretionary Trust, is that you are limited to placing £325,000 each into a Trust (otherwise 20% tax is immediately payable on any excess), where as there is no upper limit on assets that can be placed into an FIC.
• Family Investment Companies are subject to corporation tax on the income they receive. However, As corporation tax is at a lower rate than either basic rate tax and Higher rate tax, there can be significant income advantages. Also, mortgage interest is fully reclaimable and not subject to a 20% tax credit as would apply to personally held buy-to-let property holdings.
• Should the FIC hold an investment portfolio of UK companies, most dividends received by a UK company from other companies is currently exempt from corporation tax. This beneficial nil dividend rate for companies results in an increase in the growth roll-up of dividend income by deferring taxation until monies are distributed by the FIC.
• There are other practical advantages, depending on the family’s approach to investments. For example, the FIC’s Directors can choose to take greater risks from an investment strategy perspective than Trustees might be comfortable with as Trustees have to abide by Trust law.

A Shareholders agreement will need to be drawn up as a contractual document between the Shareholders. The Shareholders will only be family members and also a Family Trust or Employee Benefit Trust if applicable.

In order to make the Family Investment Company suitable to operate in a family Estate planning context, it is effectively treated as a Private Limited Company with bespoke articles of association. It requires specialist Lawyers to set up an FIC but once set up, it is taxed like any other Limited Company.

It is important to bear in mind that companies are often subject to future tax changes and reviews meaning that there is a certain element of risk that a negative tax change may occur in the future. Therefore a mix of Trusts and an FIC is usually sensible.

The articles set out the different rights and interests for each of the Shareholders in the company. By setting these share classes, often referred to as ‘Alphabet Shares’, each direct descendent family member can be allocated a different class of share. Spouses of children and grandchildren will not be allowed to own shares for protection against divorce.

This means the family members can have varying levels of control over company decisions, rights to receive dividends and entitlements to the capital value of the company.

If the assets currently belong to the parents they can use the company structure to transfer value and responsibility to their children dependent on capital gains tax issues and their own income needs. This provides the parents with an effective method of controlling family wealth and their own income through their lifetime.

An added benefit of protecting your wealth in this way is that the articles can be set up to include specific clauses that protect the shares in specified circumstances.

These can prevent shares being transferred outside of the family by restricting Shareholders to immediate family or family Trusts.

As an example, the article could state that should a child divorce their spouse, that ex-spouse will not be able to retain shares in the FIC, meaning that the assets should not be included within any divorce settlement.

However, Please bear in mind that should the case be brought in front of family courts, a judge may have the power to pass other assets disproportionately to ensure a “fair” divorce. However, control of the company is retained in the family.

As previously explained, the value of these shares will fall outside of the parent’s Estate for inheritance tax purposes seven years after the share has been “gifted” from the parents to the family member.  There are some capital gains tax considerations to be aware of in transferring the value and rights of shares from parents to other family members. Therefore, the transfers can be carefully planned to control the timing and value that is transferred and the tax implications for the family Shareholders.

With this in mind, loans of cash or assets from the parents is a common way of funding FICs initially (and therefore establishing the value the company has available to invest). The parents often hold preference shares based on repayment of loans to the company and can withdraw funds tax-free.  This is because the repayment of capital at base value is not subject to income tax or capital gains tax.

For owners of large property portfolios, this can mean both a significant reduction in inheritance tax, capital gains tax and income tax.

Setting up these companies effectively requires close cooperation between Tax Planners, Accountants, Lawyers and Financial Planners. – A network that Bluebond has already built and utilised for many clients.

Call us today if you require help in this area.