Family investment companies – an option worth considering
A Family Investment Company is a company, created by and for family members that typically will hold investments rather than operate a trade.
So, you have updated your wills to reflect what you would like to happen to your estate when you die, you have created lasting powers of attorney to choose who you would like to make decisions on your behalf should you lose capacity to do so in future, and now you are beginning to look at inheritance tax planning.
The basic premise with inheritance tax is that each individual can own £325,000 worth of assets when they die without having to pay inheritance tax and any value over that will be taxed at 40%. The Government recently increased the tax free amount to £500,000 by 6 April 2020, but only if strict conditions are met and for many people the increased amount may not apply in full or at all.
Traditional inheritance tax planning would involve making use of the basic reliefs and exemptions, such as the annual allowance of £3,000, gifting any surplus income to children and family and then often gifting into a trust.
Gifting to a trust usually involves gifting up to £325,000 to a discretionary trust every seven years. You would list your children and family as potential beneficiaries and typically appoint you and your spouse as trustees so that you can manage the funds held in the trust. As long as you survive for seven years, then the value in the trust would not be charged to inheritance tax when you die.
There are however a number of disadvantages with trusts. For instance, if you put more than £325,000 into the trust, this would be taxed at 20%, which greatly reduces their effectiveness in an age of increasing wealth across generations. In addition, whilst you can be a trustee, you cannot benefit from the assets in the trust, otherwise they will continue to form part of your estate for inheritance tax purposes when you die. Trusts are also currently taxed on an on-going basis at higher rates than individuals and companies.
This is where family investment companies, or FICs for short, come into play.
Family Investment Companies
An FIC is exactly what the name says, it is a company, created by and for family members that typically will hold investments rather than operate a trade. A typical structure would involve you being appointed as a director, and owning shares that have a right to income and a right to vote, but no right to the capital value of the FIC. Your children would then own shares that have a right to income, no right to vote, but a right to the capital value of the FIC.
You would transfer assets into the FIC, typically cash by way of a loan, and the cash would then be invested by the FIC to generate capital growth and a reasonable income stream. As the shares you own do not have a right to the capital value of the FIC, then their value is greatly reduced and so as long as you survive the creation of the FIC by seven years the value of the FIC would almost entirely fall outside of your estate and not be charged to inheritance tax.
Unlike trusts, there is no charge to Inheritance Tax at 20% on the value over £325,000, meaning any amount can be added to a FIC on day one. Further, you can continue to receive an income from your shares in the FIC, either by way of interest on your loan to the FIC or dividends on your shares.
Another advantage over trusts is that more people understand companies than do trusts, and FICs are a great way to enable younger generations to gain experience of running a company without necessarily them having to be involved in the main family business.
It has to be said that FICs are not the answer for everyone and trusts will always remain a very effective inheritance tax planning option. However, whilst FICs have historically been a tool used by the ultra high net worth, as companies continue to receive favourable tax treatment and as the value of estates across the UK continues to increase, FICs now undoubtedly need to be considered as part of any estate planning exercise.
If you would like to know more about our update or have any questions, please contact David Stokes (Principal Associate). Alternatively, please call and speak to a member of our Wills, Trusts and Estates team on 0345 073 9900 or via our website. We will be more than happy to answer any initial queries you have, and talk through the options available to you.