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As part of our week-long focus on family businesses, John mccaffery, Tax Partner and Head of Tax at Chartered Accountants and Tax Consultants Alexander & Co explains the uses of family investment companies, which have become a popular vehicle for transferring family business wealth between generations.
While not everyone is aware of these structures and their tax benefits, family-owned investment firms have recently made headlines as HMRC recently concluded that there was no evidence that the use of family investment companies was abused.
This is good news for anyone who currently uses or plans to use a family investment company and sets the stage for their continued use as part of a larger tax strategy for families.
What is a family investment company?
A family investment company (FIC) is a private company that owns and manages investments, such as property, bonds, or stocks whose shareholders are family members. These can be used as an alternative or in conjunction with trusts to transfer wealth between family members in a tax efficient manner.
They have gained popularity as an alternative to trusts, in part as a result of tax changes affecting the efficiency of the use of trusts for wealth planning which were first introduced in 2006. Within In a trust, most assets are subject to immediate 20% inheritance tax, coupled with additional charges levied every 10 years. These are in addition to the fees charged when assets are transferred out of a trust and the high tax rates on income and gains realized within the trust.
HMRC’s survey of family-owned investment firms
HMRC set up a task force to investigate family-owned investment firms in 2019. HMRC does this frequently, especially in areas of growing interest and increased activity. The team investigating family-owned investment firms was disbanded earlier this year, concluding that it had found no evidence that their use was being abused.
Advantages of a family investment company
One of the main advantages is that family-owned investment companies offer full control over investment decisions and can offer tax advantages by preserving wealth for future generations.
The structure of these companies provides great flexibility in how income, initial capital and capital payments are distributed among the holders of various classes of shares. This can offer significant advantages over trust agreements. They can also be used as part of an inheritance tax mitigation strategy.
Within a FIC, profits from investments are subject to corporation tax, rather than higher income tax.
Even with the proposed 19% to 25% corporate tax increase in April 2023, this can still offer substantial savings, compared to the higher income tax rates at 40% and 45%.
Personal circumstances will always determine whether a family investment company is the best way to protect family wealth for future generations, and it is advisable to seek professional advice.
It will need to be considered how corporate tax, stamp duty property tax, inheritance tax and capital gains tax are handled and applied within the corporate structure.
During the initial creation of an FIC, it will also be necessary to take into account the way in which it is managed with regard to the death of the founder (s), the divorce of the founder (s) and junior members, the way in which minors are processed within the structure. , how to add new family members and how to personally extract income from the business.
Overall, family-owned investment companies offer an efficient way to pass wealth down through the generations of a family in a tax-efficient manner and for family businesses, should be seen as part of a business strategy. broader tax mitigation.
To learn more about the benefits of FIC, attend our Family Business Breakfast on September 23 in Manchester city center. Participation is free and you can book here.