Family Investment Companies And Succession Planning
Sometimes better than a trust ...
POSTED BY HELEN BEAUMONT ON 20/03/2019 @ 8:00AM
A question that most people ask themselves is how do they pass on their wealth to the next generation in a tax-efficient way ...
A Family Investment Company may be more suitable for you than a trust!
The next question they ask is probably something about stopping their offspring spending all the money at once. Many of my clients have wondered about this during a succession planning session.
"The usual answer is to transfer their
assets into a trust!"
But now the trust regime is becoming less favourable in the UK, families are looking at other methods. A Family Investment Company (FIC) is one solution to this dilemma.
It offers parents the ability to retain some control over their assets whilst giving them great flexibility to customise the structure to their precise needs. An FIC also has a proven track record and is commonly known to work well.
So, what structure does an FIC need?
Put simply, a company is formed with both parents subscribing for 50 shares each. They appoint themselves as directors so they keep control.
They then transfer any assets (such as property) into the company and get a loan account equivalent to the market value of said assets.
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.
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.
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.
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.
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.
Sounds great, doesn't it? 19% instead of 45% and a Family Investment Company that grows in value as the loan account is repaid. There's got to be a catch?
Well yes, the transfer of assets into the company may give rise to Capital Gain Tax charges and Stamp Duty Land Tax may also be due. But there are reliefs available to offset the parents' exposure when the company is initially incorporated.
"Would you like to know more?"
A trust may still work for you, but a Family Investment Company may be more suitable, depending on your families circumstances. If you'd like to find out more then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.
Until next time ...
If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!
More about Helen Beaumont ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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