If you're estate planning right now, you could be considering a Family Investment Company over a Family Trust. But what are the pros and cons of each?
Although you may think a Family Trust is the natural way to go, a Family Investment Company could give you better tax advantages, so you need to decide from the start what is going to work the best for you.
A Family Investment Company (FIC) is, as the name suggests, a private limited company. It has bespoke articles of association, and all the shareholders must be family members. There is normally a written agreement between the shareholders.
Of course, there are different types of shares within the FIC itself, giving different shareholders varying levels of control. There are also different rights to dividends and entitlements to capital.
So, the person setting up an FIC gets to keep control of the assets belonging to it. And after seven years, the company's assets are outside the scope of Inheritance Tax. Transferring cash into the FIC is not subject to the Inheritance Tax entry charge of 20% when the value is above the nil-rate band of £325,000. Profits from investments are subject to just 17% Corporation Tax rather than the usual 19%. This is far lower than higher-rate Income Tax.
However, a Family Investment Company can be an expensive thing to set up as they'll involve both commercial and private solicitors and accountants. There are also ongoing returns that need to be made to Companies House, and your documentation will be publicly available as a matter of record.
Property inside the FIC may also trigger Capital Gains Tax and even Stamp Duty. Dividends could be taxed twice (Corporation Tax and Income Tax), and possible future tax changes, post-pandemic, may reduce the benefits of having a Family Investment Company.
Of course, the person setting up the trust retains control as long as they don't benefit from it. They are far more flexible than FICs are, with the trustees simply deciding how to appoint capital to beneficiaries. Again, should the person who sets up the Family Trust survive longer than seven years, the assets fall outside the scope of Inheritance Tax.
A Family Trust is subject to tax though, so if the assets produce income, then Income Tax is due, there's Capital Gains Tax on disposal of assets, and even Inheritance tax in some cases. Like Family Investment Company's, there is also regular, complex paperwork to be completed.
Just like with FIC's the Government is likely to overhaul the tax rules for trusts which will render them less beneficial, however until legislation is published, it's impossible to predict what these changes may be.
It will depend entirely on what your personal circumstances are, the value and makeup of your estate and what you want to achieve with it. I strongly recommend you speak to your tax advisor as well as keep up to date with legislation.
Up-to-date, personalised tax advice will help you make the right decision.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.