A Family Investment Company (FIC) is a private limited company used by families to manage and control wealth over generations. It is a popular vehicle for tax-efficient wealth transfer and investment management.
Taxation of a Family Investment Company
1. Corporation Tax
- FICs are subject to Corporation Tax on profits, which includes income from investments and capital gains.
- The current Corporation Tax rate in the UK is 25% (as of 2024).
2. Dividends
- Within the Company: Dividends received by the FIC from its investments (like shares in other companies) are generally exempt from Corporation Tax.
- To Shareholders: When the FIC pays dividends to its shareholders (family members), the recipients are taxed at their personal dividend tax rates. The company does not get a deduction for the dividends it pays out, but the tax on these dividends is borne by the shareholders, not the company.
3. Inheritance Tax (IHT)
- The primary IHT advantage of a FIC is the ability to transfer shares to family members. These transfers can be gifts, and if the donor (e.g., parents) survives for seven years after making the gift, the shares are typically no longer part of their estate for IHT purposes. This can significantly reduce IHT liability.
- Sometimes, FIC shares are held in trust for younger generations, combining the benefits of trust and company structures to further manage IHT liabilities.
4. Capital Gains Tax (CGT)
- CGT within the FIC: When a FIC sells assets (e.g., property, shares), the gain is subject to Corporation Tax, not Capital Gains Tax directly. The profit from the sale of these assets is included in the company’s overall profit and taxed at the applicable Corporation Tax rate, which is 25% as of 2024.
- Indexation Allowance: For assets acquired before January 1, 2018, the FIC can benefit from indexation allowance, which adjusts the asset’s base cost for inflation, reducing the taxable gain.
Advantages of a Family Investment Company
1. Control and Flexibility
- The founders can retain control over the company, even after transferring shares to family members.
- FICs allow for flexible succession planning and wealth distribution.
2. Tax Efficiency
- Profits retained in the company are taxed at the Corporation Tax rate, which is often lower than personal income tax rates.
- Dividend income within the company is exempt from tax, providing tax deferral opportunities.
3. Inheritance Tax Planning
- By transferring shares to family members, FICs can help reduce the family’s overall Inheritance Tax liability.
- Use of trusts within the FIC structure can further enhance IHT planning.
Disadvantages of a Family Investment Company
1. Double Taxation
Income generated within the FIC is subject to Corporation Tax, and any distributions to shareholders are subject to income tax, potentially leading to double taxation.
2. Complexity and Costs
- Setting up and maintaining a FIC can be complex, requiring legal, tax, and financial advice.
- Ongoing administration, including filing accounts and tax returns, can be costly and time-consuming.
3. Family Conflicts
Managing an FIC requires clear communication and agreement among family members. Disagreements over control, decision-making, and distribution of profits can lead to family conflicts. Such conflicts may disrupt the operations of the FIC and negatively impact family relationships.
Conclusion
A FIC can be a powerful tool for wealth management and tax planning for families in the UK. However, careful consideration of the tax implications, setup costs, and ongoing administration is required. It is advisable to seek professional tax advice to ensure that an FIC is the right structure for your family’s needs and to navigate the complexities involved.