DTM Legal associate Amanda Bailey discusses the increasingly popular approach in succession and tax planning.
How can you pass assets down to a generation, but retain control over them? This is the classic query which for many years has been answered by a trust.
However, Gordon Brown’s decision in 2006 to radically change the way trusts are taxed has heralded the rise of ‘Family Investment Companies’ as a more tax efficient alternative.
Amanda explains: “Trusts have effectively been under attack since 2006, they are increasingly unattractive to wealthy families because of the high tax rates applied; a 45 per cent income tax rate and a six per cent inheritance tax charge every 10 years can make for a significant tax liability.
“Family Investment Companies’ popularity continues to grow because they service a similar purposes to a trust but in a much more tax efficient way.”
What is a Family Investment Company?
Very simply, a Family Investment Company (FIC) is a UK based investment company where the shares are divided between family members but control remains with the directors (e.g. the parents).
Restrictions are placed on a shareholder’s ability to deal with the shares, which means that the value attributed to them is significantly discounted.
If a child were to go through a divorce, for example, the existence of the FIC provides a layer of protection over and above if the parents had simply made an outright gift of cash.
Who do Family Investment Companies serve best?
The companies are most easily established when there is a lump sum of cash to be invested, typically from the sale of a business, property or land or for those who have come into a substantial inheritance.
Open to Challenge?
Amanda warns that: “Care needs to be taken when establishing a FIC to ensure that it properly complies with the existing tax legislation.
“However, provided it is structured correctly, they should simply be treated like any other company for tax purposes.
“It is hard to envision H M Revenue and Customs completely overhauling the way all companies are taxed”.
DTM Legal’s trusts and estates team offer specialist inheritance tax and succession planning advice. To discuss how we can help you, contact Amanda Bailey on 01244 354805 or email amanda.bailey@dtmlegal.com.
