A FIC is no more or less than a private, UK resident company whose shareholders are family members. The parent (or even grandparent) generation funds the company either by making an interest free loan to it, or by subscribing for shares. Neither route results in a transfer for inheritance tax purposes as the founders are simply swapping cash for a loan or shares.
Inheritance tax (IHT) savings come from making share transfers to family members and so the shareholding structure requires thought. Different share classes can be established so that the children, for example, have non-voting shares. Multiple share classes also allow different dividends to be declared on each class, although this must be done carefully to avoid adverse tax consequences. The parent generation are usually the directors of the company, allowing them to control investment policy and decide the amount and timing of any dividends. Once the company has been funded, the directors will invest and manage the portfolio for a return and/or growth.
The tax advantage of using a company for your investments
Property companies have somewhat different considerations; suffice to say that one of the main drivers of property incorporations has been the restriction on mortgage interest deductions for individual investors. As a general investment (rather than property) company, however, a FIC benefits from corporation tax rates that are lower than higher personal tax rates, even after the 2023 increase in corporation tax to 25%.
Additionally, almost all dividend income received by a company is free of corporation tax. Also, expenses incurred by the company in managing its investments are tax deductible, whereas individual investors cannot claim relief for their portfolio management expenses. That’s all fine if you plan to leave the income in the company, but if you extract cash as salary or a dividend, you’ll pay personal tax at that point. Repayments of founders’ loans are not income so are tax free; that makes funding a FIC with a loan highly attractive.
As a succession planning tool, FICs allow you to reduce your estate value by passing on value in the form of shares while retaining control over the cash. With careful structuring the next generation will start to own a share of the growing wealth without being given additional spending power.
A gift of shares to an individual will be a potentially exempt transfer – so no IHT charge at the point of gift subject to survival of the donor for seven years. A gift of shares to a trust is possibly more appropriate for minor children. Gifts into trust are subject to a lifetime IHT charge if the value exceeds the donor’s available nil rate band, but, provided that shares are gifted before the company acquires any value, the IHT charge chould be avoidable.
Although there’s much to like about FICs, anyone setting one up needs to understand that they bring complexity and a moderate level of annual administration and therefore cost. In administration terms, even for a small company, accounts and a confirmation statement must be prepared and filed at Companies House, and a corporation tax return and compliant accounts need to be filed with HMRC. Once established, a company can be expensive to wind up. As to complexity, you need to think beyond the present generation and have a plan for what happens to the company and its shareholdings on your death. No one will thank you for a tax-efficient structure that results in family feuds.
So, in essence, a FIC can be a tax-efficient vehicle for managing, growing and passing on wealth. It’s reassuring to note that HMRC concluded, following an investigation, that the use of FICs was not especially associated with non-compliant behaviour, and, on the back of that finding, closed down their specialist FIC unit. That doesn’t absolve those setting them up of a duty to do so carefully, in order to get the best out of the structure and avoid unwanted tax issues, and flexibly, so that the needs and objectives of family members can be met into the future.