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Shortly before the Autumn Budget 2024, we published on these pages an article describing how Family Investment Companies (FICs) were being considered by those holding cash or asset rich portfolios as a means of efficient tax planning. Chancellor Rachel Reeves’ announcements on 30 October 2024, and their impact on family businesses, has now also focussed the minds of all business owners on the attractiveness of these vehicles.
This is why: the Autumn Budget impacts family businesses with the introduction of the following measures:
- Employers NI contributions will increase from 13.8% to 15% and the threshold from when contributions become payable will reduce from £9,100 to £5,000.
- The National Living Wage will increase by 6.7% to £12.21 an hour (with increases for those under 20 as well).
- The rates of Business Asset Disposal Relief are rising from 10% to 14% and then 18%.
- Business Property Relief (BPR) and Agricultural Property Relief (APR) for Inheritance Tax (IHT) will also be restricted with qualifying business and agricultural assets worth more than £1m no longer attracting 100% relief. They will be subject to a charge at an effective rate of 20% for IHT purposes (the changes are due to take effect on 6 April 2026, although anti-forestalling provisions already apply from 30 October 2024 – further detail can be found here).
It is worth remembering that BPR was introduced in the 1970s specifically to ensure that family businesses would be able to endure following the death of an owner without having to sell assets or be broken up to pay the IHT bill.
Tax and succession planning is now more essential than ever. One of the options to consider is a FIC.
What is a FIC?
A FIC is a UK corporate entity, established to hold investments and/or wealth for the benefit of family members, usually to the benefit of the younger generations. The term FIC is not a specific legal term with any special treatment from a legal or tax perspective, but if established correctly, can offer a tax efficient structure for wealth and assets to be transferred onto future generations.
How is a FIC set up?
Whilst each individual FIC is established taking into account the specific aims and objectives of the client, notably from a tax planning perspective (which we would always advise clients to consider before proceeding with the establishment of a FIC), common features of a FIC are:
- The FIC is incorporated as a corporate entity in England & Wales, though an existing entity could also be turned into a FIC to achieve the same goals with some pre-planning. Many FICs are incorporated as unlimited companies, thereby obtaining the advantage of an exemption to file accounts at Companies House meaning the finances of the structure remain private.
- FICs are incorporated with a niche set of articles of association containing a class of share that retains all voting rights, usually held by the founder of the FIC. At least one other class of share is created to hold the economic rights to income (by way of dividends) from the FIC or a share of capital upon a return of capital (such as winding-up) with these additional classes of share having no voting rights or rights of control over the FIC.
- Common control of the FIC on day-to-day basis will be by its directors, appointed by the voting shareholders. It is common that the initial directors include the founder of the FIC and at least one other appropriate person(s) determined by the founder.
- In order to fund the FIC and its future investments, it is common for the founders to transfer cash to the FIC, either as a share subscription or as a loan. It is also possible for the founder to transfer assets, in return for a loan being granted to the transferor by the FIC to the value of the asset transferred to the FIC. There are tax consequences to the transfer of assets and this must be considered before embarking on a FIC strategy. Depending on the maturity of the asset, the cost may be limiting.
- What are the tax considerations?
Corporation Tax
As a corporate entity, the FIC will pay corporation tax at the main rate of 25%. Returns on investments are taxed at these rates rather than at an individual’s marginal income tax rate. Where dividend income is received from equities held by the FIC, these are usually tax free when received from a company. Rentals received on investment property are taxed at the corporation tax rate and companies may still deduct loan interest from the rental income.
Income Tax
The purpose of the FIC is to accumulate family wealth in a tax efficient manner and therefore the longer the returns are held in the FIC, the better. When returns are taken out of the FIC they can be taxable in the hands of the shareholders depending on the way in which the returns are extracted:
- Dividends are taxed at the dividend tax rate (subject to the personal exemption);
- Where loans are repaid, these are tax free although interest received on the loan capital is subject to income tax.
There are ways to mitigate income tax and how returns are distributed to family members and advice should be taken on the different scenarios.
Capital Gains Tax
If the FIC sells any of its assets, the gains are included in the corporation tax return of the FIC and taxed at the corporation tax rate (usually 25%).
If the FIC is wound up (and assuming a members’ voluntary liquidation) the shareholders pay capital gains tax at 24% on the value of the assets distributed to them.
If the FIC is sold by way of a share sale, this too is a capital event and consideration received for the sale of the shares is taxed at 24%.
Since both a winding up and a share sale are capital events, Business Asset Disposal Relief may be available, subject though to the new rates which will come into effect over the next two years.
Inheritance Tax
If properly structured, assets transferred to or loaned to a FIC will not generate an upfront Inheritance Tax charge – a key differentiator between FICs and the regime applicable to trusts.
Assets held in FICs are usually “investments” and so do not attract relief for Inheritance Tax purposes. However, FICs can operate as an effective vehicle for Inheritance Tax planning, as value can be passed onto future generations through the creation of new share classes for their benefit.
Gifts to the next generation would be subject to the usual seven-year rule, and so would fall out of the donor’s estate if they survive seven years from the date on which the gift is made. There are also opportunities to structure share classes tax efficiently so that any future growth in value accrues outside the donor’s estate for Inheritance Tax purposes.
FICs provide the opportunity for directors to retain control over the gifted shares, which is often extremely helpful in an estate planning context.
Summary
We are still awaiting the legislation on the changes to BPR, but so far, there appears to be no backing down on the extent of the additional burden family businesses are going to be expected to shoulder.
Professional advice should be sought and the team at Michelmores can help. The needs of families and their planning objectives differ from family to family and we can guide you through the initial stages of structuring the FIC to implementation and ongoing corporate filing and secretarial assistance.
Please do get in touch with Cathy Bryant, Iwan Williams, Chris Smedley or any member of the Michelmores team if we can assist.
More Insight articles from the across the Michelmores departments on the implications of the Autumn Budget 2024 can be found at Autumn Budget 2024 – Michelmores.
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