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A. Introduction

1. Since the introduction of the Finance Act 2006 as an alternative or in addition to the (a) Legal Trust Deed or (b) a Self-Invested Pension Scheme, the Family Investment Company has become a popular alternative.

2. There are different names for these companies but as with most things in law what you call it is not as important as what it is in the eyes of the law.  For this work I use the increasingly commmon title the “Family Investment Company” (“FIC”) although others do use different names, such as personal investment companies.

3. Similarly, each case or family can or are different.  This is a short article but no alternative to individual and bespoke advice.

B. What Is It?

4. The FIC is a small family company based within the United Kingdom.  Usually the Company Articles are amended (perfectly legally) from the usual “off the peg” standard.  Each family will be different and some things cannot be done but the common bespoke changes to a standard off the peg Company include:

(a) the creation of at least (i) shares (enabling access to income) from (ii) shares (enabling access to capital or investments);

(b) the right of Shareholders Attorneys to attend meetings of a Company or participate in votes (common in the event of illness, the dreaded Alzheimer’s and similar illnesses being the common reasons);

(c) restriction on share transfers to blood relatives and/or

(d) the ability of a Trust to hold shares in the Company for and/or on behalf of beneficiaries (for example, younger family members) and

(e) the Donor can determine who has powers to attend its Directors and/or who can remove them.

5. As with all Companies its Articles can be inspected at Companies House.  It is the Company’s  public contract and so (please see my work on Company Formation) the Company’s Articles should be supported by a separate “Shareholders Agreement”.  The latter is a private Agreement for the Shareholders.

6. Once formed in this way and assets are transferred in to the Company it is:

(a) a potential long-term efficient way to enable a person to transer assets out of his/her estate for inheritance tax purposes but whilst still retaining control (if this is wanted);

(b) whilst within the FIC the Donor can exercise control of the Company;

(c) whilst tax treatment can change at the whym of the Chancellor it is currently tax efficient;

(d) a fortress making the assets put in to the FIC beyond the reach of either a Court or Creditors in the event of divorce or bankruptcy;

(e) as such many find a FIC allows greater control than:
(i) the old fashioned legal Trust or
(ii) the SIP regime.

C. The Shareholders Agreement

7. Often forgotten although that would be a mistake.  Each one is personal to the creator of the FIC and it has to be lawful but common provisions (remember this is the private contract for the Shareholders concerned) might include:

(a) a restriction or prevention of share transfers;

(b) power and decision of appointment of Directors;

(c) allowing the Donor as a Director if he/she wants to exercise powers in the FIC as a Director and not holder of voting shares in order to avoid holding shares which may themselves be subject to IHT;

(d) provision to enable Shareholders to join in to pre and post nuptuals to protect investments within the FIC;

(e) different Shareholders can hold different levels and sources of incom and at different times.

D. Tax

8. The following summary reflects my current understanding of the liabilities and rules as of 2018 when:

(i) putting assets in to the FIC by the Donor they will not, thanks to:

(a) Section 260 of the Capital Gains Tax Act 1992 and

(b) the Finance Act 2006 result in a CGT payment or (although the Revenue forms still have to be completed) Stamp Duty Land Tax;

(ii) when formed shares can be allocated to family members without any immediate tax.  If they have a value then that value will pass out of the Donor’s estate provided it is done 7 years before the Donor’s death (although there is taper relief also available);

(iii) similarly any Shareholders with a minority interest in the FIC will find their own shareholding will be discounted on their own deaths;

(iv) dividend income received by the FIC is not chargeable to tax;

(v) other income and CGT is at 19% and to drop in April 2020 to 18% (individuals usually start at 20%);

(vi) where there are CGT worries allowances can be claimed;

(vii) of course, there is tax on everything some way or some time and so:

(a) income tax is payable on dividends coming out of the FIC which will depend on if you are a higher or lower rate tax payer;

(b) if you are paid by the FIC a salary then salary tax just as happens with all Companies will be payable and;

(c) if there is a liquidation of the FIC and therefore a distribution then there will be a CGT hit (currently 20% distribution on liquidation);

(d) as opposed to holding assets and paying income tax on profits, there is a potential problem is the FIC makes a profit, then pays out to the Shareholders of a double-tax.  In other words, the Company is charged tax on a profit then when it is passed to the Shareholder tax is paid again but careful management in many cases will reduce the pain (for example through dividends).

E. The Alternatives

9. There are many parents who will feel that inheritance tax on death or the current rates of capital gains tax do not support a wish to do anything during their lifetimes but equally for others there may be a need or wish to:

(a) protect investments from attack or

(b) reduce tax for the next of kin on their death or on their own retirement which may trigger a sale of the family business or part of it.  The common traditional routes are:

(i) a SIP although these take time and involve cost of professional trustees in most cases or

(ii) the family trust.
he latter being still a popular device.  A decision whether and if so what will often be a decision between client and accountant or lawyer.  However, transfers above £325,000 to a trust will result in a lifetime charge to inheritance tax, whereas there is no limit to the amount which can be transferred to a FIC.

F. Bad Press

10. For a short period time an apparently clever tax solicitor devised some schemes often involving the holding of assets overseas or the proceeds of the sale of assets overseas beyond UK taxation using a Company.   Some of these schemes were derivatives of what used to be called Employee Benefit Schemes.  Some were not.  These arrangements gave rise to the Finance Bill of 2011.  Also the well known legal case of Glasgow Rangers (RFC 2012 PLC) formerly Rangers Football Club v. Advocate General [2017] WKSC and in a case involving a scheme to reduce capital gains tax on a disposal Barker v. Baxendale Walker Solicitors [2017] EWCA Civ 2056.  The two cases are both rather complicated but neither of the above fall within the type of FIC arrangement suggested above.

11. As mentioned at para 3 above, every family is different, every FIC needs as a result to be slightly different.  Further, no article can replace careful advice with the Donor.

If we can assist please contact Peter Norris (peter.norris@hassall.law) or David Hassall LLM MSc  (david.hassall@hassall.law)

6 Fore Street,
Devon, TQ7 1NY.

Tel: (01548) 854878

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