Keep it in the family! Family investment companies

It is fairly common for family members to pass investments such as commercial properties down the generations. A family discretionary trust is a popular means of providing for children and remoter generations. However, a family investment company (FIC) is sometimes seen as an alternative ‘wrapper’ in which family members might hold such properties.

What are FICs?

Most individuals will probably be more familiar with the concept of a company than a trust. The tax implications of trusts, and their relative advantages and disadvantages, are beyond the scope of this article. However, the tax regimes for FICs (and their owners) and trusts (i.e. settlors, trustees and beneficiaries) differ considerably.

A FIC is a company (normally investment, as opposed to trading) in which its shareholders are family members. For example, husband and wife may wish to apply their funds for the benefit of their adult children through a FIC, which (say) acquires commercial properties in London. It is arguably easier to pass wealth down generations in the form of shares in a company holding an investment property, as opposed to fractional interests in the property itself.

The FIC will often be funded by cash (as opposed to existing commercial properties, on which there may be inherent capital gains). The company uses the funds to invest in assets. If the FIC is funded by a loan, the company’s post-tax profits can be applied towards repaying the loan. In the above example, the parents could retain effective control of the commercial properties (e.g. by holding a controlling shareholding in the FIC, or if the company’s shares had differing rights).

Tax and FICs

A FIC gives rise to a number of tax implications. A detailed consideration of them is beyond the scope of this article, but the tax implications in the above example potentially include:

• The company’s profits are subject to tax, although the corporation tax rate (currently 19%) is lower than the basic (20%), higher (40%) and additional (45%) income tax rates for individuals. The company owners will be liable to tax when profits are extracted. However, a FIC offers the possibility of dividend payments, which could potentially be spread among family members tax-efficiently.

• Capital gains tax (CGT) charges may arise if the commercial properties (as opposed to cash) are used to subscribe for shares in the company, along with stamp duty land tax charges. A gift of shares between connected persons (i.e. parents to adult children in this case) is deemed to be at market value for CGT purposes. Consideration should therefore be given to making any such gifts when the share value is as low as possible.

• For inheritance tax (IHT) purposes, the above gift of shares from parents to adult children is a potentially exempt transfer, so no immediate IHT liability arises (by contrast, most lifetime gifts into trust are immediately chargeable transfers), and the gift will normally become exempt if the donors survive for at least seven years. Furthermore, any subsequent growth in value following an outright gift of the shares will normally fall outside the parents’ estates. However, see ‘tax traps’ below.

If the company’s shares are spread (say) between a number of children and grandchildren, the value of each shareholding is likely to be discounted, and so may (for example) further reduce IHT exposure in the parents’ estates.

In the above scenario, the company invests in commercial (i.e. non-residential) property. However, the annual tax on enveloped dwellings (ATED) will also need to be considered if the company invests in one or more residential properties with a value exceeding £500,000.

Tax traps

FICs must be handled with care to avoid falling into possible tax traps. For example:

• The ‘settlements’ anti-avoidance rules may need to be considered in some cases, such as on the transfer of FIC shares between the family members, and/or where the FIC is being funded by loans.

• The ‘gifts with reservation’ IHT anti-avoidance provisions can result in gifted shares being treated as remaining within the donors’ estates in certain circumstances.

• There are also anti-avoidance rules which can result in capital receipts in respect of shares in the FIC being taxed as income distributions (i.e. like dividends) instead.

• The ‘general anti-abuse rule’ and ‘disclosure of tax avoidance schemes’ provisions may also need to be considered, particularly for arrangements other than ‘plain vanilla’ FICs.

Practical point

The above lists of tax implications and potential traps are not exhaustive. A FIC may be an attractive alternative to trusts for individuals with some wealth. However, setting up and running a FIC involves complicated non-tax (e.g. company and commercial law) issues, which have not been considered in this article. It is essential that all the legal and commercial implications are taken into account, in addition to all taxes, duties, etc. Specialist tax and legal advice is strongly recommended.

The above article was first published in Property Tax Insider (June 2018) (

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