Historically trusts have been the preferred choice of many to pass down family wealth to future generations. However, the Finance Act 2006 brought about significant changes in the tax treatment of trusts. Whilst they do still remain an important tool in estate and succession planning for many, a stand-alone trust may not be appropriate for everybody.
As an alternative, a Family Investment Company (FIC) can offer a tax efficient way to retain control over assets and pass them down to the next generation, either instead of, or in conjunction with, a trust.
A FIC is essentially a private investment company, typically with the directors and shareholders being family members or trusts. Capital is introduced by the founder of the company, often by way of a loan.
As an example:
- Parents form a limited company providing the capital investment and issuing shares to themselves and their children (or a trust). Different classes of shares can be given different rights -‘A’ shares may have voting rights but no entitlement to dividends or capital; ‘B’ shares may have entitlement to income and capital but no voting rights.
- Giving the parents ‘A’ shares and the children ‘B’ shares would allow the parents to retain control whilst directing income and capital growth to the children. Classifying shares provides flexibility, meaning that shareholders can receive different levels of income at different times.
- Assets can be transferred into the FIC without incurring an immediate charge to Inheritance Tax, even where the sums involved exceed the Inheritance Tax nil rate band allowance of £325,000 per individual. The transfer of shares in the FIC to individuals or trusts will be a potentially exempt transfer, which will fall outside of the Donor’s estate if they survive for 7 years. Profits that are retained within the company are sheltered from personal income tax liability with tax payable at the lower corporate tax rate of 20%.
FICs can also help to protect assets in the event of divorce or bankruptcy within the family by protecting the shares from sale outside of the family unit.
Both trusts and FICs are complex arrangements, the benefits of which will depend on individual circumstances. Transferring assets other than cash into the FIC may trigger a charge to Capital Gains Tax and care must be taken to ensure the use of a FIC is appropriate to the circumstances. It is therefore important to seek professional advice. Our Wills and estate planning team can offer specialist advice on the best arrangement for you.