Family Investment company use gets the green light as HMRC concludes no evidence of tax avoidance
Family investment company (FIC) activity has been under investigation by HMRC, who set up a special team in 2019 to investigate their use. Whilst it is quite normal for HMRC to do this, the team has now been disbanded after finding no evidence that the use of family investment companies was being abused.
This is good news for the many people who use family investment companies or are considering doing so as a tax-efficient way to pass family wealth from generation to generation.
What is a family investment company?
An FIC is a private company that holds and manages investments, such as stocks, bonds or property and the shareholders are family members. They have become increasingly popular over recent years, partly due to tax changes in 2006 affecting the efficiency of using trusts for wealth planning. These changes to trusts meant that most assets moved into a trust are now subject to an immediate 20% inheritance tax charge, with further charges every ten years, together with an additional charge when assets are transferred out of a trust.
It was always thought that if a family investment company is structured to be as ‘future-proofed’ as it can from the outset and is managed as a genuine investment vehicle to benefit the family members, it would be unlikely that HMRC would take offence to these types of company structures. This does however highlight the need to obtain professional advice when setting up a FIC.
Benefits of a family investment company
An FIC can provide full control over investment decisions and the preservation of wealth for future generations in a tax-efficient manner.
The company structure provides a great deal of flexibility as to how income, initial capital and capital payments are spilt between the holders of various classes of shares. This can provide a number of advantages over a trust arrangement.
There is also a great deal of control over how assets are distributed and how they are protected, for example, when a divorce occurs in the family.
Tax rates and income can be more favourable too, profits from investments are subject to corporation tax, rather than personal income tax, which benefits from a lower rate of tax. Although the Corporation Tax rate is due to increase from 19% to 25% from April 2023, FICs will not qualify for small profits rates. This can still provide substantial savings when compared to the higher rates of income tax at 40% and 45%.
Should you use a family investment company?
Whether to use a FIC to protect your family wealth for future generations will depend upon your personal circumstances and it is advised that professional advice is sought. Alexander & Co can advise on how to set up a FIC and the tax implications arising.
Consideration will need to be given to how Stamp Duty Land Tax, Capital Gains Tax, Corporation Tax and Inheritance Tax apply and are treated within the structure.
When setting up a family investment company consideration will need to be given to the following issues:
- Divorce of both the founders and junior members
- Death of the founder(s)
- The addition of new family members to the company
- The treatment of minors
- Extracting income from the company personally
How Alexander & Co can help
Alexander & Co has worked with entrepreneurial family businesses for many years, gaining real insight into this unique sector and helping many businesses by providing a wide range of advice including accountancy and taxation matters.
To discuss how we can help you, whether it be setting up a family investment company or a trust, or more general advice, please get in touch with us by completing the form at the bottom of this page, emailing us at email@example.com or by calling our office on 0161 832 4841.
Read more on Family Investment Companies on our website here.
Download our guide to family Investment companies here.
Read more about our specialist work with family businesses here.