24 Nov Passing Assets to the Next Generation through Family Investment Companies
What is a Family Investment Company?
A Family Investment Company (FIC) is a unique entity that can be used as an alternative to a Family Trust. This concept is not new but has become more sought-after in recent years.
It is a private company that is set up and used for investment purposes and whose shareholders are family members. An FIC allows wealth to be accumulated in a tax-efficient way while retaining control over assets and enabling future succession planning.
An FIC allows for placing cash or assets into that company and passing wealth free of Inheritance Tax (after 7 years).
Why use a Family Investment Company?
A Family Investment Company offers a more effective tax environment for growth assets than holding them personally while allowing family members (who are shareholders) to retain control.
Investments and assets held privately are subject to Inheritance Tax upon death, Capital Gains Tax on the disposal of an asset and Income Tax on any profits earned. Placing investments and assets in a Family Investment Company can assist with Inheritance Tax planning.
Income made from assets or payments received on the sale of the assets will be taxed at a lower rate, in the form of Corporation Tax. This can over time result in greater reinvestment and accumulation of wealth.
What tax is paid on a Family Investment Company?
A Family Investment Company pays Corporation Tax on any money profits made from the assets and investments it holds.
Since April 2023, Corporate Tax rates are as follows:
- Companies that make a profit below £50,000 will continue to pay Corporation Tax at a rate of 19%.
- Companies with profits of over £250,000 will pay 25% Corporation Tax.
- Those with profits between £50,000 and £250,000 will pay Corporation Tax pay tax at the 25% rate reduced by a marginal relief, meaning businesses will pay tax on a sliding scale between 19% and 25%.
Shareholders of the Family Investment Company will be subject to tax on profits extracted:
- Income Tax on dividends
- Income Tax on salaries
- Capital Gains Tax on the distribution of capital following the liquidation of the company.
If you are interested in a Family Investment Company speak to one of our trusted family tax planning advisors, who will be able to advise you based on your personal circumstances and outline the most tax-efficient way to maintain your family wealth.