Why create a family investment company? 

A family investment company can be a good vehicle for tax and succession planning, but only if the potential traps are avoided.

In recent years the family investment company (or FIC) is being used by wealthy individuals for tax and succession planning. Good advice is needed from the outset to avoid potential traps. 

The example of ‘Sam’, 60, UK domiciled but not currently UK resident, shows some of the considerations involved. 

A FIC is a company that invests rather than trades. The investments are typically equity portfolios or property, and the owners are usually members of the same family. 

Sam is creating the FIC to plan for his succession in a tax-efficient manner. Normally we would advise him about the merits of a trust, but as he is UK domiciled he cannot put more than £325,000 of cash into a trust without triggering an immediate inheritance tax (IHT) charge at 20% on the excess. 

UK corporation tax is 19%, which is less than his marginal rate of tax, and he can lend in money to the FIC so that repayments of that loan are not subject to tax. More importantly, he is familiar with and likes company structures. Particularly the control he can retain over how the company is run, and the ability to give shares to his wife and children. 

He is aware that, for him, the FIC is not efficient for IHT because the loan and his shares remain within his estate. Some other individuals founding a FIC might have slightly different objectives and might pass the value to their family on creation so that the FIC can be efficient for IHT purposes too (subject to the seven year survivorship rule).

Normally capital gains tax (CGT) applies on disposing of an asset (eg to a FIC), but Sam is not UK resident yet. If he were he might still accept the CGT liability because there are concerns that CGT rates will increase soon (see article on page 5), and some of his assets have fallen recently. Stamp duty land tax is not a concern. No property is involved.

He wants to give B shares (5% of the company) to his wife, Jean, to use her lower marginal rates of tax. He will have A shares. Great care is required here. If Jean receives dividends in excess of her 5% then Sam will pay income tax on the excess. Sam also wanted a call option to buy back the B shares from Jean. This would result in all of Jean’s dividends being taxed on Sam. No call option is now included!