Mark McLaughlin looks at family investment companies to hold a property portfolio for the benefit of parents and adult children.
A family investment company (FIC) is basically a company owned by family members, which provides a vehicle to manage wealth and spread it among offspring and future generations.
Example: FIC for investment properties
Mr and Mrs Jones wished to apply their wealth for the benefit of two adult children (Adam and Brenda) through a FIC. The parents formed a company (Jones Investments Ltd) and gifted some shares to Adam and Brenda, with no immediate capital gains tax charge. Mr and Mrs Jones then funded the FIC using cash initially.
The FIC subsequently used those funds to acquire commercial properties in Greater Manchester. The parents retained effective control of their wealth by being directors and holding a controlling interest in the FIC.
FIC advantages
FICs come in all shapes and sizes, and every FIC is different. However, it is widely considered easier to pass wealth down generations in the form of shares in a company holding investment properties than fractional interests in the properties. Other potential advantages include:
Profits can be accumulated within an FIC at relatively low corporation tax rates (i.e., the top rate of tax on rental income is 45% if the properties are held individually, as opposed to a top corporation tax rate of 19%; In the above example, if Mr and Mrs Jones survived at least seven years from the gift of shares to Adam and Brenda, the value of the shares transferred would fall out of their estates for inheritance tax (IHT) purposes; The shareholders are exposed to IHT on the shares they own, but the method of valuing shares means that the value of individual minority holdings is likely to benefit from a discount to their proportionate share of the whole company; The FIC’s constitution can be drafted to give flexibility on the allocation and payment of income and capital to shareholders; ‘Alphabet’ shares (i.e., broadly different classes of share, possibly with different rights attaching to them) can give the directors control over the amount and timing of any income payments to shareholders.
Not all good news?
However, FICs are not without potential disadvantages. For example:
FICs incorporated in England and Wales must make information publicly available on the Companies House website; There are anti-avoidance tax risks associated with FICs (e.g., the ‘settlements’ income tax anti-avoidance provisions and the ‘gifts with reservation of benefit’ rules for IHT purposes); The ‘general anti-abuse rule’ and ‘disclosure of tax avoidance schemes’ provisions may need to be considered, particularly for FICs other than ‘plain vanilla’ ones. The valuation of the shareholders’ shares can cause disputes with HMRC in some cases.
Practical tip
Setting up and running an FIC involves complicated non-tax issues. It is essential that all the legal and commercial implications are carefully considered, in addition to all taxes, duties, etc. Specialist professional advice is strongly recommended, as appropriate.
