A FIC is a “family investment company” and a tax efficient way of passing on your wealth without losing control of it.
Paying 40% Inheritance Tax (IHT) on the fruits of your labour really is the final nail in the coffin. Trusts are a popular vehicle for passing estates down to future generations but that said, there can be an immediate 20% tax charge on gifting assets into a trust; 10 year anniversary taxes; exit taxes and a hefty 45% tax on any income generated within the trust.
So how might a FIC work for you?
First of all, we’d like to explain that this is not “death bed” tax planning. It’s ideal if you expect to survive the next seven years, and of course tax planning would be so much easier if we all knew our exit date.
A FIC is a company which you and your family have shares in.
Different classes of shares can be created if you prefer, so that you have all or most of the voting shares and your family has non-voting so that you retain control. You have the flexibility of deciding who will have shares; how many shares they each have and what benefits they will receive longer term.
It’s worth noting that if you own a trading company with surplus cash in it, then your trading company could also loan money to your FIC. This effectively avoids the need for you to extract the cash personally as dividends, and paying up to 38.1% income tax on this distribution.
Once you’ve transferred cash and/or assets into the FIC, it then be used as a long-term investment vehicle to acquire other assets.
Let’s assume that you have £1 million surplus cash in addition to other assets. You have four family members you’d like to pass this cash to, split equally. They’re adults but you think they’re too young to have this now, and you’re also worried about the possibility of bad marriages and divorce further down the line.
If you do nothing and pass away, HMRC will collect £400,000 in IHT on the £1 million and your family members will receive £150,000 each, assuming your other assets use up your IHT allowance. Sadly, this means that HMRC is your main beneficiary and receives more than your family members.
If we set up a FIC, you can subscribe for say £20,000 of A voting shares, and £980,000 of non-voting B shares.
You can then gift the B shares to your family. Provided you survive 7 years, these gifts are free from IHT. It’s also important to make the gifts before the value of the company increases, so that you don’t suffer capital gains tax.
You now have a company under your control holding £1 million in cash. This can be used to buy other investment assets or simply earn interest on it.
Transferring other assets into the FIC
You can transfer any asset into your family company, and typically this might include second homes, private share portfolios and so on.
Moving non-cash assets into a FIC can crystallise other taxes such as stamp duty and capital gains tax, so each asset needs to be looked at on a case by case basis. If you have free cash, paying say 20% CGT now on a gain still compares favourably to the 40% IHT payable on the full market value on death.
You have a holiday home which you bought for £300,000 and it is now worth £500,000.
If you gift this asset to the family FIC you will pay £56,000 capital gains tax, being 28% of the £200,000 gain (it will be slightly less but we’ve ignored the small annual exemption allowance for illustrative purposes).
If you die with this asset as part of your estate, then the IHT payable on this asset will be £200,000, being 40% of the market value.
Alternatively, rather than a gift, you could sell it to the FIC if you need this money to live on over the next 7 years.
On-going advantages of the FIC
As mentioned above, you can retain control of your wealth as a shareholder and director and make future investment decisions if you wish to.
The tax advantages also include:
- income generated by the company will be subject to corporation tax at 17% from 1 April 2020 (19% up to 31 March 2020) compared to up to 45% personal tax payable
- income could be distributed to the family members as dividends, of which the first £2,000 is currently tax free and the rest taxed at 7.5% for basic rate taxpayers. This is ideal if you have family members with university fees to fund.
- The FIC can also be used for long term pension planning for the family shareholders. It could re-invest its income into other assets over the long term and also making pension contributions for the benefit of the family to reduce (or eliminate) any corporation tax payable on its income. The family members can then extract income from the FIC at a later date when their income is lower, and therefore their tax rate is likely to be lower too.
- Capital gains made by the company will be taxed at 17%, rather than 20 – 28% payable by individuals.
Ultimately distributing the wealth to the family
When the time is right to distribute the value of the company to the family as a whole, the most tax efficient way to do this is usually to liquidate the company. Any non-cash assets will generally be sold and the cash distributed to the family members, who will pay 20% capital gains tax on this (provided they don’t set up a similar company within 2 years).
Alternatively, individual family members could sell their own shares in accordance with the shareholders agreement you put in place on day one. This generally means selling the shares back to the company for cash, or to the other family shareholders.
The above information is a general guide only and based on 2019/20 tax legislation.
It is, of course, no substitute for your own personal estate planning, so please do ask for our advice before making any changes to your affairs.
Our tax team are looking forward to hearing from you.