Overview
Welcome to another instalment of our topical tax tips! I’m Bernard Critchley, the Tax Manager at Aspen Waite in Bridgwater. Today, we delve into the intriguing world of Family Investment Companies (FICs) and how they can be a strategic tool for managing substantial investments and achieving tax efficiency.
What is a Family Investment Company?
A Family Investment Company operates like a typical company but focuses on investments rather than trading. It involves share capital and invests in properties, cash, or shares in a portfolio. The primary advantage of an FIC is that it pays tax at the corporation tax rate, which is generally lower than personal income tax or capital gains tax rates.
Setting Up a Family Investment Company
- Founders: Typically, the founding shareholders set up the FIC, transferring assets into the company in exchange for shares. This transfer can be made via a loan or by utilising the Capital Gains Tax (CGT) incorporation relief.
- Tax Efficiency: The FIC pays taxes at corporation tax rates, providing substantial tax savings. However, transferring property into an FIC might trigger a CGT charge and Stamp Duty Land Tax (SDLT), which available reliefs can sometimes mitigate.
- Control and Flexibility: Founders maintain control over the company, including the payment of dividends and capital return. This is usually managed through tailored articles of association and shareholders’ agreements.
Advantages of Family Investment Companies
- Lower Tax Rates: Corporation tax rates are lower than personal income tax rates, and assets sold within the company are taxed at these lower rates.
- Tax-Free Dividends: Currently, share portfolio dividends are not subject to corporation tax, making any income received by the FIC tax-free.
- Deduction for Loan Interest: For residential property portfolios, rental profits are taxed at a lower rate, and full deduction for loan interest is allowed, unlike the restricted relief for individuals.
- Long-Term Strategy: FICs are most beneficial as a long-term strategy, allowing wealth to be accumulated and passed on to future generations efficiently.
Is a Family Investment Company Right for You?
While FICs offer numerous advantages, they are not suitable for everyone. They benefit those with surplus assets or investments who do not require immediate income to maintain their lifestyle. It’s essential to consider the set-up costs and ongoing administrative expenses associated with FICs.
Conclusion
Family Investment Companies can be an excellent alternative to family trusts, enabling parents or grandparents to retain control over assets while passing on wealth in a tax-efficient manner. However, they are best suited for individuals with long-term investment goals and surplus assets.
Get in Touch
If you have any questions or need personalised advice on setting up a Family Investment Company, we’re here to help. Email info@aspenwaite.co.uk and get in touch with us. We look forward to assisting you in optimising your investment strategy.
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