Family Investment Companies - FIC
Over recent years, with changing legislation, Trusts are no longer the most tax efficient way to transfer assets to future generations. The Finance Act 2006 brought in changes and we also find ourselves with a Trust’s tax rate being aligned with additional rate for individuals at 45% while capital gains are taxed at higher rate of 28%, so Trusts have certainly greatly curtailed the clients ability to pass assets.
A Family Investment Company is an alternative, it is simply a private Company who's shareholders are members of the same family and whose Memorandum & Articles of Association can be drafted to suit their needs. The way that the shares are structured can allow the passing of ownership of underlying assets to the next generation without the older family members necessarily losing control of them too soon.
Unlike a Trust, no tax charge is payable on setting up of the FIC when the initial subscription for shares is made in cash only.
Let’s consider a family with considerable cash saving who create such an FIC. The parents remain as directors’ with them and their adult children becoming shareholders. They transfer substantial cash into the Company with no tax implications.
Since the parents wish to retain control over the Company the Articles of Association are drafted in such a way to give the children no voting rights. This means they are entitled to receive dividends, ultimately capital should the FIC be wound up but they will not have the power to make financial decision in the same way as other shareholders, although these rights could be changed in the future.
If the Company makes profits, corporation tax will only be payable at the 20% rate as from 1st April 2015. This is significantly lower than the higher cash rate of income tax applicable to a Trust Fund.
With regard to extracting profits, withdrawing can be made to the shareholders in the form of dividends according to their personal circumstances.