Family Investment Companies And Succession Planning

So, what structure does an FIC need?

1. Put simply, a company is formed with both parents subscribing for 50 shares each. They appoint themselves as directors so they keep control.

2. They then transfer any assets (such as property) into the company and get a loan account equivalent to the market value of said assets.

3. Now the assets and the liabilities are equal so the company has no value. The parents then decide to transfer shares to their children. Because the shares have no value at the time of the transfer, there is no Inheritance Tax or Capital Gains Tax due on the gift.

4. Depending on the family dynamic, different types of shares can be allocated, voting and non-voting rights can be enacted and the parents can retain control of the FIC by holding slightly more shares than the children do. However, the value of the shares retained by the parents will be subject to Inheritance Tax if they are still being held at the time of death.

5. The Family Investment Company is subject to corporation tax at 19% on its taxable income (better than the 45% due on a discretionary trust) and the post-tax profits can be used to repay the loan to mum and dad. If the loan repayments are interest-free, there is no gain, so no income tax is due.

6. As the liability to the 'bank of mum and dad' reduces (and therefore the value of the company's assets increase), the value of the shares also increase. This growth is outside of the value of the parents' estate as they no longer own the shares they gifted to their children.

7. There is Inheritance Tax due on the balance of the loan account at the time of death, but assuming the debt is repaid in full whilst still living, the profits can be retained in the company or distributed to each shareholder.