A FIC enables parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning. The company could be set up as a UK unlimited company rather than a UK limited company, in order to reduce the filing requirements.
An unlimited company will not have the same protection from creditors as a limited company although, assuming that the only assets held by the company are, say, investments and not property for example , it is unlikely that claims will be brought against the company.
In addition, where assets were held prior to 1 January , an indexation allowance will be available to reduce the gain chargeable to tax. Where the asset disposed of is shares in a subsidiary company, Substantial Shareholdings Exemption may be available to exempt the gain. Proceeds from the sale of investments can therefore be reinvested in the company, having suffered less tax than would be the case for an individual reinvesting the proceeds of the sale of investments held in his own name.
Most dividends received by a UK company including foreign dividends are exempt from corporation tax. Interest may be treated as a distribution where it is paid in respect of non-commercial securities. Most dividends will fall into one or more of the exempt classes.
There are general and specific anti-avoidance measures, but in general, unless a distribution is paid as a contrived means of avoiding tax on what would otherwise be taxable income for the company, the anti-avoidance provisions should not be applicable. Dividends and interest received from overseas may be subject to withholding tax. Rates of withholding tax may be reduced under the terms of the relevant double tax treaty and it is often easier for a company to obtain the benefit of the treaty rate of withholding tax than for an individual.
Withholding tax can be offset against the UK corporation tax on the corresponding income. Certain treaties will not allow a reduced rate of withholding tax to apply if the income is not subject to UK tax, but these are relatively few. By contrast, individuals are not eligible to claim tax relief on interest on loans to acquire a portfolio of shares.
Expenses incurred by the company in managing its investments and running its business will be eligible for corporation tax relief. Certain items are not eligible for tax relief, such as entertaining. By contrast, an individual investor cannot obtain tax relief on the expenses of managing his share portfolio. The company will be able to offset items against its taxable income — eg interest receivable and taxable dividends ie dividends not exempt — and capital gains. There are potentially, therefore, two charges to tax on extraction of profits; one at company level and one at shareholder level, although this can potentially be managed depending on effective tax rates and the residence position of the recipients.
Ben Melling Partner, London. You may also be interested in. Tax Factsheet — Should you incorporate your property rental business? As a top 20 UK accountancy firm, and advisers to some of the UK's wealthiest individuals, Saffery Champness is a dynamic and exciting place to launch your career. Find out more about your career with us. View the latest news, publications, factsheets and forthcoming events at Saffery Champness.
However at the time of writing we are in a position where for many asset values have fallen dramatically and the tax charges that may have been prevented the transfer of assets may not now be in point. Now may therefore be a good time to think about restructuring the family wealth. On creation, other family members and often family trusts are brought in as shareholders. Different classes of share are issued to enable flexibility around payment of dividends.
It is also possible to capitalise debt creating redeemable preference shares to extract capital at no cost. The founder shareholder generally maintains control over the investments or is responsible for appointing an adviser and the payment of dividends. The Articles of Association and the shareholders agreement can be drafted to protect the shares from sale outside of the family, making this type of structure more effective in a divorce.
In addition where the FIC holds an equity portfolio there may be no tax at all as dividend payments are often tax free from company to company. This can increase the return on the investment significantly. Again the rental profits in the company are taxed at preferential corporate rates and companies still have the ability to deduct any loan interest from the rental income which is now being restricted for personal investors. The investment is typically made by way of a loan and this can be repaid from profits tax free.
It should be noted that HMRC have been known to challenge the tax treatment of repayments of interest free loans. In our view assigning part of the loan to the other shareholders and potentially capitalising the debt can prevent this. At the time of writing however no changes have been made. The company wrapper shelters the investments from income tax until the funds are extracted from the company. When profits are extracted the shareholders will be liable to income tax on any amounts received.
Payments are usually made by way of dividend and are subject to rates as outlined below. The FIC is created to benefit the family and as such parents and children are generally included as shareholders. It is also possible and can be beneficial to include a trust as a shareholder to offer more flexibility. Dividends paid to minor children are taxed on the parents. However, for children over 18, payment of a dividend up to the basic rate band can be a very efficient way of extracting funds to help with costs such as university fees.
It is not generally beneficial to pay dividends to the founder shareholders as their income levels are usually high. The combined tax rate of the company and the income tax would be higher than if the asset was held directly. The FIC structure is of most benefit where the capital and income can be retained within the company for long periods, or indeed used as a structure to pass on to the next generation in the same way one would use a trust.
As with income tax, any assets sold within the company would be charged at corporation tax rates rather than Capital Gains Tax CGT. On the sale or liquidation of the company the shareholders would be charged to CGT on the value of their shares less any cost. Not only is value passed to the other shareholders on the creation of the company subject to the seven year survivorship rule but any increase in value of the investments is transferred immediately. Any further shares can be passed on later down the line, potentially via a trust.
These changes are in law as yet therefore if you are considering moving wealth to the next generation we would recommend this is done sooner rather than later.
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Posted on 06 July Shares in the FIC, or assets to subscribe for them, are given to family members without an inheritance tax IHT charge as long as the donor survives for 7 years. FICs are companies and thus their profits are taxed at corporation tax rates. Companies do not pay tax on dividends received from most other companies. The unit is tasked with conducting risk reviews of private companies used by family offices and high net worth individuals to manage their wealth and making sure that they are operating in line with UK tax laws.
According to the PR firm, HMRC is also likely to examine how FICs could be used as a means for ultra-high net worth individuals to move assets offshore, for example by transferring assets to another company incorporated in a lower tax jurisdiction overseas. As well as looking at the possibility of moving assets offshore any review of the tax treatment could cover a number of other areas.
We have always taken the view that creating a FIC is about protecting wealth from the injudicious actions of family members rather than illegitimate tax avoidance. There is the same tax consequence on the gift involved in creating a FIC as there would be if the gift were of the underlying funds. A FIC therefore remains firmly in line with UK tax law rather than an attempt to exploit any loopholes. If implemented, such a change could discourage large lifetime gifts generally, including setting up FICs.
In contrast, an Office of Tax Simplification report last summer suggested that the need to survive for 7 years from the date of a gift to escape IHT could be reduced to 5 years, although coupled with abolition of other exemptions and reliefs.
The value of FIC shares held by shareholders will be discounted for IHT purposes from the proportion of the value of the total assets in the FIC that they represent because they are usually a minority interest in the company and have restrictions on them. Reform of IHT may not at the moment have the same priority for the Government as other areas which bring in more tax but is certainly one to watch in future. The normal company tax rules applying to a FIC have been increasingly beneficial as the gap between corporation tax and personal tax rates has widened.
Before dividends are paid from a FIC, there is a deferral of income tax over the position where the assets are held personally or in a trust. FICs are rarely established as trading entities and usually only involve members of the same family, so FICs generally fall into the bracket of closely held investment companies. Historically, such companies paid the highest rate of corporation tax on profits. This was still less than the highest income tax rate for individuals so the tax deferral until income is distributed as a dividend, even for investment companies, is not new.
This benefit offsets the disadvantage of not being able to distribute the capital of the FIC easily without possible double tax charges and may be seen as an acceptable trade-off. If, however, a higher corporation tax rate for investment companies was re-introduced or shareholders were taxed on undistributed FIC profits, the advantage would be reduced.
The income tax deferral via a FIC is in any case just a bonus of using a corporate structure.
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