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David Denton, Technical Consultant, Quilter Cheviot, examines why Family Investment Companies have become a more widely used means to pass on wealth between the generations.
There are numerous ways to pass wealth down the family line, each with their own merits, and for many years trusts took centre stage. However, in 2006 Gordon Brown determined that most new settlements should come under the relevant property regime for inheritance tax (IHT), and therefore be subject to a 20% entry charge for transfers in excess of the NRB, as well as exit and period charges of up to 6%. In other words, popular life company flexible trusts came under the same regime as discretionary trusts, so its perhaps unsurprising that HMRC data evidences that the use of family trusts has since fluctuated. It was from here that Family Investment Companies (FICs) first became seen as an increasingly popular alternative.
Of course, loans to trusts, even when discretionary, do not constitute transfers of value, and other popular options, such as discretionary discounted gift trusts, aren’t fully measured against the available NRB (just the reduced value of the gift, and not the value representing the present-day value of the future income stream). Additionally, the NRB is reusable every seven years, and extra value may be addable, under normal expenditure relief. In other words, FICs should not mean trust planning is disregarded, and they may go hand in hand.
So, for those looking for flexibility in planning for wealth outside of the trust options already described, why are FICS back in fashion? Although Family Investment Companies first became popular in the late noughties, interest was dampened in 2019, when HMRC established a unit to consider their use. In the summer of 2021, following the unit’s closure upon finding no evidence of correlation between the use of FICs and non-compliant behaviour, there has been a resurgence of interest. Their popularity is frequently driven by the ability of parents to make transfers, without giving away control, or suffering relevant property charges associated with trusts.
In essence, FICs are companies that house a family’s long-term investments such as stocks, shares and mutual funds (also potentially some types of property, though subject to Capital Gains Tax on transfer in, as well as potentially Stamp Duty Land Tax). Expenses incurred by the FIC are generally deductible, including the investment manager’s fee. Parents initially fund the FIC, by directly subscribing for shares or by making loans. Subsequently some shares are gifted (as PETs) to younger family members, who can benefit from the FIC.
However, shares with voting rights retained by the parents can enable them to retain significant control over the FIC, and as board members, they can determine the investment direction and when any benefits to shareholders are provided, including which shareholders enjoys dividends. According to their actual construction (share type, memorandum, articles and shareholders’ agreements etc) growth in value may emerge in the gifted shares, and because the sum of the parts may be less than the value of the whole, there may be additional IHT benefits. This is where bespoke legal advice is needed in terms of valuing a close investment holding company according to voting rights, fractional ownership and directors’ powers.
Quilter Cheviot mange a significant number of company investments, including family investment companies, and fully recognise a significant consideration is determining the appropriate holdings within the FIC, to minimise its own exposure to tax. Generally, corporates do not suffer Corporation Tax on dividends received from shares held directly. But if held through other vehicles by the FIC, tax can be artificially inflated, or the timing changed – note the loan relationship legislation from 1996 and 2008. And of course, there is a considerable difference between income tax for wealth owned personally of up to 45% and corporation tax for FICs of up to 25%, but profit also will ultimately need to be extracted from the FIC, with the relevant taxation of dividends.
For those advising wealthy families where FICs have not been considered, certain valuable features may have been overlooked. Of course, it is imperative when planning to transition wealth that all options are considered before structures are established, particularly for business owners, selling up and converting a trading entity that once enjoyed business relief into cash. Though FICs are by no means a panacea, particularly for larger estates, where owners are comfortable with being the founder of a company, and interested in controlled giving, consideration should not be overlooked.
Here at Quilter Cheviot, we believe that Paraplanners play an essential and fundamental role in the financial planning process. We are committed to supporting the paraplanning profession to further build on your expertise. Therefore, we are pleased to present our 2023 Paraplanner Week, back for its 4th year. This CPD- qualifying series will offer essential learning covering a range of topics including Consumer Duty, regulation in 2024, market and political update, vulnerable clients and our geopolitical outlook with guest speaker, Tim Marshall (Reporter and Author of Prisoners of Geography).
Find out more HERE
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