Family wealth incorporated
With trusts no longer having the tax advantages they once did, are family investment companies now the best way to get a good return on family savings?
Have family investment companies (“FICs”) replaced trusts as the best way to get a good return on family savings?
Trusts have always been a standard way of passing family wealth between generations without relinquishing control over assets. Whilst trusts still very much have their place as a wealth protection vehicle, many of the tax benefits have eroded over the years, with ever rising administrative burdens.
Families can therefore be forgiven for not knowing where to turn once they have taken advantage of ISAs and pension allowances. The tax free dividend allowance has certainly been helpful for some; however, with rates of dividend tax on their way up, many higher income families may still be feeling left with diminished net investment income. Similarly, many individuals who let residential property have seen tax bills rise as higher rate relief for mortgage interest is now a thing of the past.
An increasingly popular alternative over recent years has been to set up a family investment company. These were recently under review from HM Revenue & Customs but appear to have come out unscathed and are still therefore a realistic alternative to trusts, offering similar practical advantages; assets can be protected and wealth passed down the generations without relinquishing control. However, they can be established and managed by a very simple, common structure in the form of a single private company.
The company would typically be run by the parents as directors, with family members such as children owning the shares. Decisions would be made by the directors and there are very few restrictions on the types of investment which can be made, meaning that the investment company can be used to hold anything from rental properties to share portfolios and investment funds. There is flexibility around the extraction of profits and, being an unregulated entity, costs can be kept relatively low.
The company can generally be funded tax free, and investments can grow at lower rates of tax, or even free of tax in the case of UK (and some overseas) dividends. Income and gains arising in the company will be subject to corporation tax, which is currently 19%. This is due to increase to 25% by 2023 and not all companies will be affected. Either way, this is still a significant way below the top rate of tax on income of 45% for individuals.
There will be running costs and set up costs for the company; it would need to prepare accounts and corporation tax returns and there can also be an additional tax point when funds are extracted. However, all these can be planned for so that in the right circumstances the company can pay for itself many times over in the long run.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.