Stashing the cash in a family investment
KEEPING it in the family is what most of us aspire to do when it comes to money. Setting up a family trust would once have been the preferred solution and can be still. However, opting for a family investment company (FIC) is increasingly popular.
This is because of legal changes to the way certain trusts are treated, making them less advantageous, while HM Revenue & Customs has given FICs a clean bill of health, finding no wrongdoing and disbanding the task force launched to probe the sector.
Structured as a private limited company, an FIC is run by a family or group of individuals to manage and control their collective wealth. The main purpose, targeted on highnet-worth individuals, is to hold and manage assets such as property, shares, and other investments.
Rebecca Durrant, national head of private clients at Crowe, describes it as “a useful tool for tax and familywealth planning”.
She added: “The traditional trust still very much has its place in terms of wealth protection for future generations, however, the flexibility that an FIC offers makes it an excellent choice.”
Eleanor Lewis, chartered tax advisor and tax senior manager at Dains, noted: “We normally advise that to be cost- and tax-efficient, at least £1m-£2m is transferred into the FIC initially.”
Typically owned and controlled by family members, who are also the shareholders of the company, the directors make decisions on investments and how wealth is distributed.
Shares can be gifted to children and grandchildren, allowing them to benefit while also minimising inheritance tax liabilities, as they are considered a potentially exempt transfer, meaning the value of the gift would fall out of the donor’s estate for IHT purposes, provided they survived at least seven years.
Additionally, there are tax advantages, as the company can retain profits and pay corporation tax at a lower rate than personal income tax.
Speaking to Insider Media, Jim Truscott, head of Beyond Corporate’s specialist corporate team, provided an example of how an FIC might work, though stressing many different approaches can be adopted. He stated: “We acted for an individual in his 50s who had built up a share portfolio of value, and whilst retaining some income from that portfolio, wanted the growth in capital to flow to his children.
“Following some discussion, the best structure to accommodate this client involved his transferring his share portfolio to the FIC, under a loan arrangement. As shareholder in the FIC, the founder would receive dividend income, and under the loan he would receive repayments from the FIC. Meanwhile his children (also shareholders of the FIC but with different share rights) would have the ultimate benefit of capital growth associated with their shares in the company. Over time and according to income needs, the client intends to consider assigning part of the loan to his children – giving them an income stream from that repayment obligation.”
When, then, is an FIC not suitable? Accounting and consulting firm Saffery commented: “When investing in property, care must be taken to ensure that the FIC does not fall foul of the Annual Tax on Enveloped Dwellings (ATED) regime. This tax applies to residential properties worth over £500,000 held by a corporate entity. In addition, investments benefitting from tax incentives and reliefs such as Business Asset Disposal Relief, Business Property Relief or the Enterprise Investment Scheme, may be better off being made personally as the FIC would not be able to get the tax advantages available to individuals.”
It is important to seek professional advice before setting up an FIC, as the legal and tax implications can be complex.