BUSINESS CLINIC

RRL senior tax associate Aneta Williams, explains the benefits of Family Investment Companies – an alternative to trusts.

HAVE YOU CONSIDERED A FIC?

Many people consider using trusts as part of their lifetime estate planning for the practical benefit of maintaining control over the decision-making regarding assets, whilst having made a gift of the assets for inheritance tax purposes.

A Family Investment Company (FIC) is another extremely useful structure for passing wealth to the next generation without losing control over the assets – but little is known about these structures, largely due to a lack of adequate advice for people to consider.

A FIC can be used as an alternative to a family trust. It has potential inheritance tax (IHT), income tax and capital gains tax benefits.

Significant changes to the taxation of trusts in 2006 presented structures like family investment companies as alternatives to the use of trusts for estate planning.

FICs are typically formed by parents providing funds for investment through interest-free loans. The loaned funds are invested and the share capital of the company is structured so that they maintain control over the company and assets, whilst the majority of the value falls outside of their estate for inheritance tax purposes.

The share capital of a basic FIC is typically structured to have two types of shares:

• One class of shares with all voting rights and no rights to capital (voting shares); and

• Another class of shares with no voting rights but all rights to capital (capital shares).

The voting shares (and directorships) are retained by the parents so that they retain control over the investments. The capital shares, to which the majority of the company value would be attributed, are gifted to the children. The capital shares will also predominantly benefit from any growth in the value of the company.

What are the tax advantages of FIC’s: Who should consider using a FIC?

• They are merely limited company structures – people are much more aware of limited companies and how they work rather than trust structures

• Income/profits/gains realised by a FIC’s are subject to much lower rates of corporation tax (currently 19%, increasing to 25% from April 2023) compared to the highest personal income tax rates of 45% • Those who have already used trust planning and maximised the value they can gift to trust every 7 years

• Those not wishing to use trusts for estate planning e.g. due to not understanding them, previous bad experiences of trusts that have been inadequately run etc

• Those with insufficient relevant earnings to make personal pension contributions

• If dividends are then paid to the shareholders, up to £14,570 can be paid tax free for the 2022/23 tax year, with further dividends up to the basic rate threshold taxable at just 8.75%;

• Dividends received by a FIC are exempt from tax and can then be reinvested to provide increased capital value for the children

• FICs can claim a corporation tax deduction for interest paid on loans taken out against the value of its investments (eg in order to acquire new shares or to manage the operation).

Such expenses are not, however, relievable for individuals

• Employer pension contributions can be paid by the FIC (treated as management fees)

• Management fees (e.g. salaries, investment costs, accountancy fees) are deductible against income for corporation tax purposes. Tax relief for such expenses is not available to individuals; and • Those requiring access to the existing capital (here in the form of the loan repayments), and requiring flexibility here (parts of the loan can be gifted to other parties in later life).

The creation and Alternatives to the maintenance of FICs requires experienced tax use of trusts for advice to ensure that the estate planning benefits are maximised, and any tax risks are navigated. We have a lot of experience in this area. If you would like to discuss more about a FIC, please get in touch with RRL’s in-house tax specialists: Truro 01872 276116 Penzance 01736 339322 post@rrlcornwall.co.uk www.rrlcornwall.co.uk

• On the liquidation of a FIC, capital gains tax (CGT) will be charged at just 20% on any capital distributions.