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How can a Family Investment Company (FIC) be used for inheritance tax planning?

Wealthy individuals and families are seeking alternative routes to trusts to pass on their wealth tax efficiently. With corporation tax rates being relatively low currently and set to reduce further, many are considering the opportunities a FIC presents in terms of succession planning.

What is a FIC?

A FIC is a private company, registered in the UK. The company is usually set up as a FIC from the outset with current family members as shareholders. It differs from a standard company in that the transfer of shares outside of a specified level of family connection is generally prohibited by the company constitution – the Articles of Association. This provides a key layer of protection by ensuring that control of the company is kept firmly within the family, while the existence of different classes of shares can preserve flexibility over the distribution of funds.

What are the benefits?

In many circumstances a FIC can prove a tax-efficient inheritance tax planning solution for families. The potential benefits for a trading company include:

  • An individual can transfer a significant sum of cash into the company tax-free in order to fund its activities and then draw down repayments over time;
  • Shares can be gifted down the generations inheritance tax-free if the donor survives seven years following the date of the gift (other reliefs may apply);
  • Company profits, including capital gains, are subject to corporation tax – currently at 19% (set to drop to 17% from 1 April 2020).

What do I need to consider?

Whilst there are benefits to a FIC, there are also a number of considerations to be aware of:

  • Non-cash assets which are transferred into the company may be subject to a capital gains tax charge and also stamp duty land tax if property is involved;
  • Sums paid out to an individual shareholder will be subject to income tax to the extent they exceed personal tax allowances;
  • Company filing obligations relating to accounts and taxation will need to be met, together with other reports relating to disclosure of ownership.

There are significant complexities involved which need careful planning to achieve the desired result.

If you would like to discuss whether a FIC could be a suitable option for you and your family, please get in touch.

 

 

Date: 21st February, 2019
Author: Alison Palmer

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