Mark McLaughlin points out that family members might wish to consider holding commercial properties or other investments within a company ‘wrapper’.
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 acquires commercial properties in (say) 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 FICsA FIC gives rise to a number of tax implications, a detailed consideration of which is beyond the scope of this article, but the tax implications in the above example potentially include:
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) and ATED-related CGT will also need to be considered if the company invests in one or more residential properties with a value exceeding £500,000.
FICs must be handled with care to avoid falling into possible tax traps. For example:
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.
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