Family Companies
Written by Charlie Palmer on 07/03/2019

Problem:

Trust rates of tax are the highest in living memory. Income tax is 45%, plus exit charges and the 10 year tax charge.

Solution:

Corporation tax rates are now due to go down to just 17%.  So put the assets into a company instead and the income is then subject to just the new 7.5% dividend tax (32.5% for higher rate payers & 38.1% for Additional rate earners above £100k pa).

So you can use this instead of trusts as your vehicle to transfer money down a generation. 

So the article in the video encourages IFAs to Set up a family investment company (FIC) to enable funds to be gifted, beyond the nil rate band and retain control with lower tax.  You know about the corporation tax, so what are the details on the company structure?

Essentially, it’s a private company where the shareholders are the family members.  Parents retain control over assets with voting shares, and involve the next generation with non voting shares.  It is smarter than a trust, because with a trust any transfer that exceeds the settlor’s available nil rate band will trigger an immediate inheritance tax charge.  Not so with companies.  Clever eh?

Cash transferred into the company can also be an interest free loan.  You could loan assets into the company in the same way.  It will not be regarded as a transfer of value for IHT purposes and the loan can be extracted from the company later tax-free!

Parents get the voting shares – so they get to control the operation.  All advisers should be aware just how worried elderly parents can get about their children getting divorced, and losing their fortune that way.   

Next Gen who are hungry for their inheritance get the non voting shares – which can give them ownership without control.  A smart way to the transfer of value, I’d say, because if you do this in a trust, the tax keeps getting tagged onto the Settlor, no matter how smart you think you are, the HMRC are absolutely onto this sort of Trust tax abuse.

So let’s compare that to a discretionary trust where the funds are a PET going in and settlor cannot be a beneficiary.  

Not so neat.  By using a Family Company you avoid the ten year IHT charge, and the high rate of dividend tax in discretionary trusts.

One problem is that capital gains realised by the company are chargeable to corporation tax at 17% from 2020.  That is not so good – until you compare it to individual CGT that is taxed at 28%.  

When it comes to dividends received by the Family Company those that are UK based are exempt from corporation tax – so no ongoing corporation tax for a pure play share portfolio in the Family Company.   However care should be taken for pooled funds in OEICs.

The company will also get a corporation tax deduction for interest on loans taken out against the value of its investments, where the loans are used for the purposes of the company’s business (eg acquiring new shares in that same portfolio!).  

For the shareholders in the company, on a personal tax basis, their tax return will be the same as for any holding of shares in any other private limited company, and broadly as follows:

  • Income tax on dividends: Nil taxpayers will have no liability, basic rate taxpayers 7.5%, higher rate taxpayers at 32.5% and additional rate taxpayers at 38.1%. Dividend allowance is nil rate up to a cumulative £2,000 of dividends in a tax year.
  • Income tax and National Insurance on any salaries received 
  • CGT on the liquidation of the company – usually at 20% for higher rate taxpayers.

If you are a fan of the inimitable Techlink experts you can find a video summarising some of this here  https://youtu.be/8frTP5VLiHc

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