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Planning for a Better Future? Forget Trusts. Think Family Investment Companies! - Published Nov 16

With the uncertainties of the Brexit and the European Union still incapable of unionising fiscal policies, those individuals with significant assets and savings are looking to Family Investment Companies (FICs) to provide a definitive route for their future.

For many years Trusts have provided a tax-efficient means of estate planning, as well as helping one’s children and grandchildren. Recent changes to legislation for UK domiciled individuals have limited what you’re able to place into trust, in nearly every case to £325,000 within a seven-year period.

This restriction is perhaps the driving force in the renewed interest in FICs, a concept which has actually been around for many years.

Consider the FIC as a company into which you can build different rights, restrictions and share classes.  It does not necessarily have to trade and can simply hold different assets as an investment portfolio, or possibly even the transfer an existing portfolio of investments into an FIC, depending on whether this creates any taxable event.

What are the benefits and why would you bother with the additional expense?
If managed correctly, assets can grow and income then becomes taxable within the company at 20% (for UK companies, this is to be reduced to 19% by 2017 and down to 17% by 2020) rather than at the higher rate of income tax. For example, with regards to UK dividends (income from share capital), there is no tax payable at all within the FIC.  At that time you can decide whether you want to take some income from the FIC, either as a dividend distribution from the FIC, or perhaps you simply “draw down” some of the loan used to set up the FIC in the first case.

The “deferral” of tax under personal assessment also means that you remain in control of when you are personally assessed for tax – a very similar to the concept of the whole of life assurance investment bonds.  This adds to the overall effect of keeping control of your wealth, in terms of how it is invested, the tax planning advantages and ensures that the assets pass on safely during and after your lifetime.

As with all planning aspects it is imperative that you understand any disadvantages.  The costs and administration involved in setting up a limited company.  Technically, your accounts are a matter of public record, which anyone is free to inspect.  Possibly, and in the longer term, if the company pays tax on gains and then you also take that out as a dividend, you could pay more tax as a result.

Setting up a FIC is not a clear and straightforward choice.  Ensure you undertake the required the due diligence beforehand, not just with an accountant or tax adviser, but also a financial adviser and, where necessary, a legal adviser. For example, there may be some challenging effects to planning in respect of Wills, who you want to be shareholders, and the benefits you want each associated individual to get in future.  Essentially, savings in income tax will in the most part outweigh the potential risks, and possible longer-term inheritance tax (IHT) or capital tax savings on top of that.

How do I fund an FIC?
The company founder can establish a large director’s loan account from which they should be able to withdraw funds in later years with no adverse tax implications. This could also be a mixture of funding by loan and by share capital.

How does the tax position compare when comparing ownership with/without a FIC?
In the UK, corporation tax is currently 20% (income tax up to 45%), due to fall to 17% by 2020.  Investments in UK shares also provide tax free UK dividends received in a FIC.

How should a FIC be structured?
This should be founded on your long term objectives.  One of the key features of the FIC is their flexibility. For instance, you may have a founder shareholder, who keeps a tight control over the FIC, with the different classes of shares for each family member, delegating further flexibility over how dividends are distributed and also future asset growth.  Even though trusts have become less fashionable, many FICs can have trusts as shareholders for that added layer of certainty.

This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action. 

Raoul has a weekly radio feature (Raoul’s Rant) on the Owen Gee Solid Gold Sunday morning show on KissFM Algarve.