Family Investment Company VS Trusts
I have often been of the mind that trusts are useful to retain both a degree of flexibility and an element of control when gifting assets, and invariably they are not (as popular media would like you to believe) a vehicle for saving tax. This is due to the higher rates of income tax, capital gains tax and also the potential for inheritance tax to be paid on the underlying trust assets.
A Family Investment Company (FIC), for some people can have the benefits of a trust, without some of the tax disincentives.
The concept of a Family Investment Company is not new, as it is simply a company which is established to manage family investments, but is taxed as a corporation rather than a trust.
How a trust Works
A trust is best thought of as a vehicle to hold assets (by the trustees) with instructions on how these assets might be used for income, capital growth or loans to certain classes of people (the trust deeds). The trust is set up by the “settlor” and the beneficiaries could be as broad as children, grandchildren, their spouses, the settlor’s siblings etc.
The legal owners of trust assets are the trustees and there is no reason why the Settlor can also not be the trustee but under current rules a trust can continue up to 125 years beyond the date of establishment.
By varying the terms of the trust (the trust deed) control can be exercised in terms of how and when beneficiaries can benefit on a “binding” basis, or by simply setting a list of preferences (non-binding) through a letter of wishes.
Changes to trusts over the years have made them less tax efficient, particularly for those looking to gift assets in excess of a few hundreds of thousands, or thereabouts, and family investment companies may solve this current gap.
Family Investment Companies
A family investment company is essentially a private limited company with an objective to be employed for family estate planning purposes. Rather than a trust deeds a family investment company will have articles of association and can have separate agreements between shareholders who are typically family members.
It is possible to create a range of different share classes which will allow family members to have different rights of:
• Control of the company
• Income (dividends)
• Capital repayment
For these reasons, a Family Investment Company shares many of the attributes to the trust in terms of flexibility and control, but unlike the trust the settlor can enjoy a bigger benefit from the company initially and change its structure over time.
A common means of funding such companies is a loan from the founder (equivalent to the settlor of a trust) who enjoys a repayment of this loan rather than a dividend or salary. This is normally classed as a return of their capital as so is not usually subject to income tax (though interest paid would be).
The family investment company can hold shares in other companies, collective investments, property invariably without the tax penalties associated with trusts; trusts would normally pay income tax at the rate of 38.1% or 45%, capital gains tax at the rate of 20% or 28%, and a 6% “periodic charge to inheritance tax”. For companies the current rate of corporation tax is 19% but there can be additional taxation when money is drawn from the company.
For these reasons there can be other practical advantages depending on the family’s investment strategy and their risk appetite.
Trusts are, for many, the default option for gifting assets with an element of control and protection. But for those gifting significant values family investment companies, in addition, or as an alternative for trusts can be appealing.
An estate planning approach for trusts and planning investment companies tends to involve multiple disciplinary advice, with legal tax and investment aspects and I specialise in this advice being a Chartered Financial Planner as well as member/affiliate member of the Chartered Institute of Taxation and Society of Trust and Estate Practitioners (STEP).
If you would like to discuss any concept of this blog in more detail please do not hesitate to get in touch.
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