Campbell Dallas: Growing Popularity of Family Investment Companies

Campbell Dallas

Growing Popularity of Family Investment Companies

Family Investment Companies (FIC) have become an increasingly popular alternative to trusts for inheritance tax planning purposes.  They can provide a straightforward, cost effective structure that enables wealth to be passed onto the next generation but with the flexibility to retain control over the assets within the structure.

While discretionary trusts traditionally provided a mechanism by which assets could be passed into a vehicle for the benefit of other family members, with the role of Trustee allowing control to be maintained, the tax regime applicable to trusts has become increasingly expensive. The investment income arising in such a trust is generally taxed at 45%, capital gains at 20% and a ten yearly inheritance tax charge at 6% of the value of the assets (subject to available Inheritance Tax Reliefs) can also apply. The FIC in comparison will suffer only a 20% corporation tax charge on both income and gains, with no ten yearly charge applicable. There are of course tax charges on the extraction of income from the FIC and this type of vehicle is therefore most efficient when viewed as a long term investment vehicle ie with profits retained within the company

A FIC can be used as a vehicle into which surplus cash can be extracted and then invested

How does a FIC work?

A family investment company is essentially a private investment company which is designed to operate in a similar way to a discretionary trust. The directors and shareholders of the company are generally family members and the company’s governing documents will include bespoke provision relating to:

• Control of company investment strategy;
• Distribution of profits;
• Return of capital;
• Transfer of shares; and
• Appointment of directors

New dimension and use for a FIC

For many taxpayers with their own trading business a long term aim may be to realise their business and benefit from a 10% rate of tax on the disposal as a result of Entrepreneurs’ relief. Any investment assets held within the trading company or indeed significant surplus cash, can result in the loss of the relief. A FIC can be used as a vehicle into which surplus cash can be extracted and then invested. With the correct structuring there is no tax charge on the funds moving from one corporate entity to the other, thus both protecting the trading company’s status for Entrepreneurs’ relief and allowing the gross funds to be invested without tax leakage. The popularity of the FIC as an investment vehicle looks set to continue to increase with its flexibility allowing further benefits to be derived over an above the often, original purpose of succession planning. Replacement of the 10% wear and tear allowance.

Campbell Dallas have experience of setting up a number of family investment companies for clients and If you would like to explore this issue further or have any general tax questions, please do not hesitate to contact Aileen Gates at aileen.gates@campbelldallas.co.uk or telephone us on 0141 886 6644

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