Companies can have multiple classes of shares and the shares can have different rights. These rights cover:
- Capital Growth
- Income via Dividends
This can be of particular benefit to families.
Family Investment Companies (FICs), sometimes called Smart Companies, are particularly useful for Inheritance Tax (IHT) and have been used for over a decade as an estate planning tool.
In its simplest form parents lend money to the company and the company is owned by their adult children, but FIC’s can be structured to go beyond that with different assets and share classes.
They are a great alternative to partnerships which are taxed at income tax rates allowing faster growth as Corporation Tax starts at 19% (25% top rate) and income tax can be as high as 45%.
Capital Gains Tax is paid at Corporation Tax Rates (19%/25%) and they don’t suffer from 10 year anniversary or exit charges that are applied to Trusts.
The only slight downside is that extracting profits from a company will incur tax for the individual.
Over a period of time the income and capital shares will be moved to younger members of the family and the older members will retain the voting rights.
HMRC Family Investment Companies Unit
HMRC have been investigating FICs since 2019 and have now stopped, their findings are published in the meeting minutes 13th May 2021
In the research we undertook there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours. As with any analysis of a taxpaying population, the same broad range of tax-compliance behaviours were observed, with no evidence to suggest those using FICs were more inclined towards avoidance.
Tax risks related to FICs
The key findings in relation to the tax risks associated with FICs are outlined below:
• The use of FICs appears to be a planning strategy, often with the primary objective generational wealth transfer and mitigation of Inheritance Tax.
• There is some diversity in the way that a FIC is structured and managed, creating tax risks and compliance activity across a variety of tax regimes, including Inheritance Tax, Capital Gains Tax, Stamp Duty Land Tax and Corporation Tax.
The team have been subsumed into WMBC and FICs are now looked at as business as usual rather than having a dedicated team