Whilst the name may suggest otherwise, a FIC is not a special type of entity – it is simply what the name suggests, a company (usually a private limited company) that contains investments and is typically owned by a family. Some FICs are set up purposefully to achieve certain objectives, and some happen out of circumstance, such as a company which sells off its trading assets and is left with funds to invest.
In UK tax, FICs are commonly used for both income and inheritance tax planning and to formalise the ownership of assets between family members.
The ways FICs can be used for tax planning:
There is no definitive list of when and why FICs are recommended as part of a tax planning strategy, but the most common examples are:
Inheritance tax planning
FICs are often used to provide a vehicle (a company) for an individual to make gifts from to their chosen beneficiaries, such as family. Lifetime gifts of shares in the company can be made, whether to individuals or into trusts, and subject to normal gifting rules for inheritance tax and capital gains tax. FICs are often practically easier to make regular gifts from – for example, it is much simpler to gift a number of shares in a company than it is to gift an interest in a property or investment bond.
Another common use of FICs for inheritance tax planning is to provide a means for an individual to limit their interest in the growth of an investment. For example, an individual may wish to stop their estate from growing in value for inheritance tax purposes (as opposed to wanting to give assets away) and a FIC can be used for this purpose, either by carefully structuring the rights of shares held or by the use of loans to fund the FIC. Another way of looking at this is an individual can ‘cap’ the value of their interest in the FIC, allowing the growth to pass to the next generation or their chosen beneficiaries.
FICs can have simple or complex share structures and the set up largely depends on what the individual or family is hoping to achieve.
Lower rates of tax on investment income and gains
A wealthy individual holding investments in their own name may suffer high rates of income tax when compared to holding those investments in a FIC. For example, an individual who is an additional rate taxpayer receiving interest may suffer 45% income tax on the returns (47% from April 2027), whereas a company would more likely pay 25% corporation tax. This is not a direct comparison as in a FIC the income would then belong to the company, and further taxes may be paid on extracting it. The ‘saving’ may be best achieved by someone who does not need the income and allows it to accumulate in the company.
In some cases, a company receiving dividend income will not pay any corporation tax on the receipt, when compared to an individual paying up to 39.35%.
For corporation tax purposes, expenses incurred in managing investments may also be deductible in arriving at a taxable profit, whereas an individual generally receives no relief for investment expenses.
Income tax planning for grandchildren and non-earners
FICs are also used to provide taxable income for those with little or no other income, as a means of providing those individuals with a source of income that is taxed at an efficient rate. An example of this would be a grandparent gifting shares in a FIC to a grandchild who is under the age 18. When dividends are paid on those shares, the grandchild may be subject to either no income tax or a considerably lower rate of income tax than their grandparent.
Of course, there are a few important points here to achieve this tax efficiency. Firstly, the grandchild in this example is receiving income from the FIC and there must not be any conditions to this – if they gave the income back to their grandparent the planning would fall subject to anti-avoidance measures. Secondly, the documents relating to the grandchild’s ownership of shares must be completed correctly and the grandchild would therefore be a shareholder who is entitled to certain legal rights over their shares. Finally, in a situation where a parent gifts an asset to a child under age 18, any income from that asset will be taxed on the parent until the child turns 18, unless the income is below a £100 per year.
Are FICs complex to own and operate?
FICs are often ideal for individuals who have owned their own company in the past, as they will be familiar with the day to day running of a company. FICs are incredibly useful for individuals who want to give away wealth but maintain a level of control, as a FIC will permit directors to be appointed, board meetings to be held, etc..
For those less familiar with operating a company, FICs certainly add a level of administrative requirements to get used to, alongside a need to understand certain aspects of company law. Having advisers in place such as ourselves for accounting and tax matters, and a solicitor for company law matters can prove invaluable.
It should also be noted that FICs will appear on Companies House and certain information about the directors and shareholders of the company, and what it is doing, will become public information.
What to watch out for when considering a FIC
The tax planning opportunities with FICs are often at their best if it can be set up with cash, the family having taken careful advice on the set up of the FIC so that the objectives of having one are understood. Where an individual holds non-cash assets that they would like to fund a FIC with, this may lead to tax implications on the initial set up. For example, the transfer of an asset into a company is likely to trigger capital gains tax on the deemed disposal of that asset, and additional charges could arise such as SDLT if the asset is land or property, or IHT where the gift creates a chargeable lifetime transfer.
Profit extraction is another area where advice is needed. If an individual wishes to extract and use all of the income from their investments then a FIC may cost more tax overall when you take into account the corporation tax paid by the company and further taxes charged on the individual when they extract them.
There are also a number of anti-avoidance measures that can apply to FICs if advice has not been taken, a common example of which is where an individual receives a limited right to income only. Ensuring the purpose of the FIC is understood and implemented correctly is key to maximising the benefits of having one.
As you can see from the above, FICs offer great tax planning opportunities for many and should be considered as part of an overall tax planning strategy.