Family Investment Companies

Estate Planning Options

Clients often ask us whether they should set up Family Investment Companies as part of their estate plans. We have therefore set out below the main points to consider when determining whether this is a suitable structure for your specific circumstances. 

Key takeaways

  • Family Investment Companies can be very efficient estate planning vehicles. Especially where there are income and realised capital gains not needed. These can be reinvested into the company, where they can be funded without triggering significant capital gains tax liabilities
  • This allows flexibility for the amount, originally used to fund the company, to be retained and accessed if needed. Income can also still be received but future growth in the assets would be outside the scope of inheritance tax
  • If all the income and gains realised by the company are distributed to the shareholders there may be an overall higher level of tax on these amounts
  • Company administration costs also need to be taken into account.
  • There are other structures such as a family limited partnership which should be considered in case these are more appropriate.

Why choose a family investment company

There are a number of benefits arising from setting up a Family Investment Company as part of an estate planning strategy. The largest is perhaps that future growth in the value of the assets transferred could be immediately outside your estate for inheritance tax. There is the flexibility to access the original amount with which the company was funded should you need it. There is also the ability to retain access to the income during your lifetime if you wished to do so. Another welcomed element is the ability to retain some control over the assets by the appointment of directors – including yourself. This allows the assets to be passed in a way that you are happy with.

How does it work?

Achieve the above benefits through the following:

  • If the company is funded by way of loan and none of the shares in the company are held by you, then you have no interest in the company and its value can’t be in their estate. 
  • If the initial funding is done by way of loan, you can access the amount the company is funded with by recalling the loan.
  • If you wish to retain the income during your lifetime, you can also have two classes of shares. One of which has a right to income. The other one has the rights to assets on a winding up. As the income shares generally cease to exist when you pass away, they would have no value on your death.

Other things to consider when deciding if family investment companies are right for you

Funding of the company can trigger immediate capital gains if not done in cash. This should be balanced against the benefits outlined above. This is because transferring an asset to the company is considered to be a disposal at market value for capital gains tax purposes. Importantly, the charge arises with no cash changing hands to fund it. If more than one person is providing assets and becoming a shareholder, you may have more than one annual capital gains tax exemption of £12,300 to reduce the amount payable. There may also be capital losses which can be used to lessen the impact.

It’s also important to consider if income and realised capital gains generated by the company are needed on an annual basis. The company pays corporation tax at 19%. However, there would be additional tax paid at up to 39.35% on any dividend distribution to the shareholders. This can result in a relatively high overall level of tax being paid.

There are other costs of administering a company to consider. Such as annual accounts, corporation tax returns, and companies house filings to be completed each year.

As a result of the above, it would be worth looking at other structures such as a family limited partnership. It would be worth seeing if these can achieve the same core objectives, but be more appropriate from an income, capital gains tax and administrative perspective in your circumstances.

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