Introduction

Family Investment Companies (FICs) are vehicles which have become fairly widely used as an alternative to trusts for investment and succession planning purposes in recent years. FICs are flexible investment vehicles as there are no particular restrictions on the types of assets into which investments can be made. FICs are particularly suitable where funds are to be invested for the longer term as the corporation tax payable by the company will generally be lower than personal income and capital gains tax liabilities, although personal tax liabilities may arise on extraction of funds from the company. 

FICs may also be suitable for succession planning purposes, as shares in the company could be given to children or grandchildren who, depending on the rights of the shares, may be able to receive distributions from the company. This may be especially relevant where an individual wishes to provide for their grandchildren (for example, to assist with payment of school fees). 

It should also be noted that the Disclosure of Tax Avoidance Schemes (DOTAS) rules that relate to financial products mean that, in some cases, the use of a FIC may result in the issue of a DOTAS number which would need to be included on tax returns. 

In this note we have briefly outlined the main tax aspects of FICs. The investment, legal and regulatory aspects of establishing a FIC should also be considered, and appropriate tax, legal, regulatory and investment advice taken before establishing a FIC. 

Taxation

Funding the FIC

A FIC is normally funded in one of two ways; by way of subscribing for shares or by way of loan. If the FIC is funded using sterling cash to either subscribe for shares or to make a loan, there will generally be no immediate tax implications of funding the FIC, provided the funds transferred to the FIC and the value of interests received in exchange are the same. 

A capital gain or loss may arise if assets other than sterling cash which are already held and which are standing at a gain or loss are transferred to the FIC. Capital gains tax will be payable if gains are realised on the transfer of assets to the FIC. A capital loss will arise if assets standing at a loss are transferred to the FIC, but it may only be possible for the loss to be relieved against gains realised on transfer of other assets to the FIC.

If assets are gifted to the FIC and the value of these assets exceeds the value of interests received in exchange, inheritance tax may need to be considered. 

Taxation while profits are retained in the company

Corporation tax

FICs are often UK resident for corporation tax purposes and so are required to pay corporation tax on profits. Corporation tax currently applies at a rate of between 19% and 25%. Companies with less than £50,000 in profits typically pay 19% tax, with the rate increasing until it reaches 25% for companies with profits in excess of £250,000. However, FICs may be regarded as close investment holding companies for corporation tax purposes, which would mean that a 25% corporation tax rate applies irrespective of company profits. 

Income profits

UK resident companies are required to pay corporation tax on most types of income, though corporation tax is normally not payable on dividend income. By comparison, individuals pay up to 45% income tax on income, except for dividends, which are subject to a tax rate of up to 39.35%. The rate of tax payable on income received by the FIC may be lower than the rate which would be payable if the income were received personally, depending on the individual’s income level.

Capital gains 

Corporation tax will be payable on any capital gains realised by the FIC. As set out above, the rate of corporation tax is between 19% and 25% depending on the company’s profit level and activities, compared to up to 20% for individuals who realise capital gains on disposal of shares or loan notes. The maximum rate of capital gains tax for individuals is 28%, which can apply where gains are made on disposal of residential property or carried interest. 

International aspects

This note is prepared on the basis the FIC is or will be UK resident. If the FIC were non-UK resident, it would generally only be required to pay corporation tax on UK source income and some UK source gains, but anti avoidance legislation would need to be considered for UK resident shareholders. Non-UK domiciled individuals may be able to claim the remittance basis of taxation to the extent the FIC receives foreign income or gains and such individuals should seek appropriate tax advice. The overseas tax position would also need to be considered.

Extraction of profits

Dividends

Individuals are generally required to pay income tax on the extraction of profits from companies as dividends at a tax rate of up to 39.35%. A 0% rate applies to the first £1,000 of dividends received during a year (2023/24). There could be an element of double taxation where dividends are received by individuals, as profits are already subject to corporate tax when made by the FIC. 

Repayment of loans

If the founder lends funds to the FIC, the loan can generally be repaid tax free. Income tax would be payable on any interest received on the loan. 

Making loans to investors

In some circumstances, companies may be able to loan funds to their shareholders (legal restrictions may apply in some cases). If the FIC were to make a loan to shareholders, tax liabilities may arise for both the company and the shareholder. These should be considered when deciding if/how to extract funds. 

Sale or liquidation

Capital gains tax may arise if shares in the FIC are disposed of at a gain, for example, on sale, at a rate of up to 20%. A capital gain may also arise if the company is liquidated. In principle, this could result in income retained in the company which is included in the proceeds on sale or liquidation being subject to a lower tax rate than would have applied if the company had paid the funds it received out as income. However, it should be noted that there is anti-avoidance legislation that could treat the amounts received as equivalent to dividend income for tax purposes if the FIC has funds which could be used to pay a dividend, or if certain conditions are met when a distribution(s) is received on a winding up. 

Remuneration and benefits

If individuals receive remuneration (including benefits) from the company due to being an employee or director of the company, they will be required to pay income tax at their prevailing tax rate. National insurance will also be payable by both the FIC and the employee/director. Both income tax and national insurance would be collected through PAYE. Due to the payment of national insurance the total amount payable to the Exchequer may be higher than if the underlying income were received personally. 

Where appropriate, the FIC could contribute to a pension for the benefit of employees or directors of the company. The FIC may be obliged to make minimum pension contributions on behalf of employees due to auto enrolment. This is a complex area and specialist pensions advice should be sought. 

Succession 

The founder could give shares in the FIC to family members without an immediate inheritance tax charge arising (though capital gains tax may arise if the value of shares at the date of gift is more than the original cost of the shares to the donor). No inheritance tax is payable on gifts of shares to other individuals, provided the donor survives for seven years after making the gift, otherwise up to 40% inheritance tax is payable on the value given away. The inheritance tax positions of the founder and other family members need to be carefully considered, as up to 40% inheritance tax could be payable on the value of each individual’s interest in the FIC held on death (e.g. the value of shares). 

If shares in the FIC are settled on trust, the donor may be liable to pay up to 20% lifetime inheritance tax on the value given to the trustees (depending on the availability of the inheritance nil rate band), with further inheritance tax becoming payable if he or she does not survive for seven years after making the gift. If a trust owns shares in the FIC ongoing inheritance tax charges may arise every ten years or on distribution of assets from the trust, depending on the specific facts. 

Inheritance tax is a complex area and appropriate advice should be sought.

Other Practical Considerations

Control

Day to day control of a FIC rests with the board of directors. The directors can decide how the funds are invested (though as mentioned at the beginning of this note, appropriate investment advice should be taken) and vote on the extent to which dividends should be paid to different classes of shareholder. The founder can choose who to appoint as director(s) of the FIC when it is established, which could include him or herself if he or she wishes to retain control of the funds, or other family members. In essence, it is up to the founder on set up to dictate how tightly controlled he/she would like the FIC to be.

Privacy

FICs may be either limited or unlimited companies. Unlimited companies have historically had fewer obligations to file documents with Companies House, resulting in greater privacy. It should however be noted that all UK incorporated companies are now required to file details of people with significant control over the company. This information is publicly available. In certain cases annual reporting to HMRC may be required under the Common Reporting Standard. HMRC may share information they receive with overseas tax authorities. 

It should also be born in mind that unlimited companies expose the shareholders to any potential debts which the company fails to discharge, a significant factor which should be considered. 

Assets

There are no particular restrictions on the types of assets a FIC can hold, though careful consideration should be undertaken where assets may be eligible for tax relief if they were acquired directly by the individual. For instance, if shares to be acquired may qualify for relief under the Enterprise Investment Scheme if held personally.