Family Investment Companies (FIC) are receiving a lot more press in recent years, particularly with the restrictions introduced in relation to pensions, mortgage interest relief on buy to let properties and the value of assets that can be transferred into a trust.
In this article, we will provide a brief overview of what a FIC is and the potential benefits to you of using an FIC.
What is a Family Investment Company (FIC)?
An FIC is a Limited company, which is set up with the purpose of making investments. The investments can be in property, shares and/or most other investment opportunities you can think of.
The shares are normally owned by a family or a family trust with some or all of the family also being the directors responsible for the day to day operation of the company.
Usually the founding director providing the funds, will control the company via the voting rights attached to the shares and/or via the controlling the board of directors.
What are the benefits of an FIC?
In basic terms, if you set up a FIC, you can transfer cash or assets into the company enabling you to access the capital and receive interest on the monies, if required.
It is also possible to transfer assets you already own into the company; however, Capital Gains Tax and/or Stamp Duty may be payable and this should be reviewed prior to making any decision to transfer any assets to the company.
Whilst you retain access to the initial capital value, any income or capital growth belongs to the company and the shareholders. From an inheritance tax (IHT) position this has the advantage of ensuring the future income and capital growth is outside of your estate for IHT purposes, subject to any shares you decide to hold in the company.
The company can use the loans you provide to make investments and any investment income/growth will be subject to Corporation Tax at 19% rather than your personal rate of tax, which can be as high as 45%. This allows more money to be retained by the company for further investment or to make repayments to you of the monies you loaned to the company.
A FIC used as a property investment company also has the advantage of receiving full tax relief on mortgage interest in relation to buy to let properties, whereas individuals only receive a maximum of 20% tax relief. This means an FIC is a consideration for building a buy to let property portfolio, but there are other factors that should also be considered before using an FIC for this purpose.
What are the disadvantages of an FIC?
The government may change the tax law, reducing the benefits of operating an FIC. As we have seen in the past, HMRC are not afraid to push for changes in the law, where they perceive that people are using existing rules in a way in which was not originally intended by parliament.
Running an FIC incurs costs in relation to both setting up the company and the on-going compliance requirements of completing accounts and tax returns for the company. In addition, certain information has to be filed at Companies House and is available on public record.
Is an FIC worth considering?
An FIC works well, when there is substantial money to invest or where you have assets which are expected to increase in value substantially and also for those who wish to leave the income generated in the company to grow. An FIC is also a good option for those who want to start to give away some of their assets to the family, whilst retaining access to the original capital, as well as retaining control over the assets and investment decisions.
An alternative option to consider is the use of a family trust, which also provides protection to the assets and allows control to be retained; with the advantage being that you do not have to decide on who receives a share of the assets at the time you set up the trust. However, transfers into trusts during your lifetime in excess of £325,000 can be subject to a 20% Inheritance tax charge and; therefore, are generally used for assets worth up to £325,000 or for assets which may benefit from an Inheritance Tax Relief. It is also possible to combine both options by putting shares in the FIC into a family trust.
If you would like to discuss whether a Family Investment Company might be of benefit to you, please contact Jason Oram at this office for a FREE initial consultation.
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted by the author or Essex Abel Ltd.