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 Corporation Tax at 19%. This is far lower than higher-rate Income Tax.
"FIC's are tax-efficient and an excellent way to transfer wealth from one generation to the next!"
However, a Family Investment Company can be an expensive thing to set up as they'll involve your solicitor and tax advisor. 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.
"What about the classic Family Trust then?"
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.
"So, which is better?"
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.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about a family investment company, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.
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 has specialist knowledge and experience in tax planning and uses 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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