Richard Curtis suggests that a family investment company could be useful when passing assets to future generations.
It is a natural instinct for individuals to wish to preserve their wealth for successive generations of their family. Trusts may seem a natural way to achieve this. However, the alternative of a family investment company (FIC) is worthy of consideration. This may be particularly true for entrepreneurs already familiar with the limited company structure and given the tax charges that can apply to trusts.
Further, the share structure of the FIC can offer some flexibility, because the company’s articles could restrict share ownership to bloodline members of the family. This should protect assets in the case of a divorce, although planning may be required when assets pass on death. Different share classes would allow dividends to be allocated to specific family members. Care should also be taken with provisions in the articles regarding share transfers, the resolution of any conflicts of interest, the appointment and removal of directors, and how they make decisions.
Setting up the company
Generally, parents setting up the FIC would be issued with voting shares ensuring control of the company, but perhaps with no entitlement to capital growth. Non-voting shares giving rights to dividends and capital growth could be issued to other family members before the company holds cash or valuable assets.
Allocating such shares at this stage will be important to avoid later reorganisations that might give rise to transfers of value and inheritance tax issues.
Passing assets to the company
Ultimately, the FIC exists to hold assets or cash for the benefit of future generations, but care needs to be taken when passing such assets to it. For example, gifts from one individual to another will be a potentially exempt transfer (PET) for inheritance tax purposes. However, a company is not an individual, so a transfer of cash or assets directly to the company would be chargeable if more than the nil-rate band.
One solution is to loan money to the company, which uses it to purchase assets. Alternatively, money could be given to family members (a PET), who then loan this to the company. These loans can be withdrawn as and when required or passed to the next generation. Again, such a gift could be a PET.
Of course, if assets are transferred or sold to the company, do not overlook capital gains tax (and stamp duty land tax or its equivalent in Scotland and Wales, if applicable).
Company liabilities
Once assets are owned by the company and producing income or gains, the FIC will be liable to corporation tax. If (as is likely) it is a close investment holding company, the company will not be eligible for the small companies rate of 19%, and would be taxed at 25%.
In calculating its corporation tax liability, dividends from shareholdings held by the company will probably not be taxable. Further, the company can claim relief for salaries paid to directors for managing its investments and pension contributions, and other benefits could be provided to employees or directors. Generally, the FIC is probably best seen as a means of accumulating wealth for future generations because the corporation tax liability is likely to be less than the potentially higher rates of income tax payable by individuals. However, if regular income withdrawals will be required, potential double taxation (first as corporation tax and then income tax on, say, dividends paid to the shareholders) is likely to result in excessive liabilities.
Conclusion
It will be essential to determine whether an FIC is more suitable than a trust in each case, and careful planning at the outset should help to avoid unexpected tax problems later.
Practical tip
An FIC could be established as an unlimited rather than a limited company. The former may provide more privacy as it does not have to file accounts with Companies House. However, the members do not benefit from limited liability and would be responsible for company debts and liabilities if not covered by its assets.
