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An alternative to trusts?

View profile for Robert Webb
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When it comes to tax planning there can often be a temptation to keep up with the Jones’ and enter into the latest new tax planning schemes.  In some cases this may be a sensible move, but in others there is a distinct possibility that you may just get caught out, and that careful planning ends up being overshadowed by the tax then due.  Just such a situation occurred in late 2016 with a number of high profile figures being caught out by the Eclipse Film Partnership schemes, with some reportedly facing “life-changing” tax bills.

For most people, the dizzy heights of such schemes don’t even appear on the radar, and there is simply a wish to pass on assets to their family in the most secure and tax efficient way possible.  For many years there has been very little in the way of alternatives to trusts when considering inheritance tax (“IHT”) planning.  With successive governments introducing increasingly complicated rules in relation to the taxation of trusts some clients have been disinclined to proceed with such an arrangement.

With competitive rates of corporation tax it is clear that in recent years the option of a Family Investment Company (“FIC”), has been growing in popularity.  Following Theresa May’s announcement to the CBI on 21st November 2016, it seems that the rate of corporation tax may well be reduced further than already expected in the coming years.  Add to that the uncertainty of Brexit and what that may hold in terms of corporate tax rates, it seems likely that the appetite clients are showing to find out more about FICs will only grow. 

The first question of course is what is a FIC?  In simple terms, a FIC is a private family company that makes and holds investments, which may include equity investment or property portfolios.  The directors will be family members, with shareholders being family members and/or family trusts.  As such, every FIC will be bespoke to the family concerned, taking into account attitudes to risk and also the nature of the assets available and the family dynamic itself.

In practice there will be an initial cash injection (often a loan) provided by, for example, the senior family members, and shares will be issued as one would generally expect with any corporate entity.  Unlike a trust arrangement, there will be no immediate charge to IHT.

Whilst creating a trust will mean a periodic 10 year charge and exit charges to contend with such charges would not apply in the case of an FIC, but compliance requirements will remain and should not be overlooked.

As with any company structure, income and gains will be subject to corporation tax (currently 20%, but reducing to 17% by 2020), and in the case of gains the FIC will have the added benefit of indexation allowance, something that is no longer available to an individual or a trust.  Consequently, although the rates of CGT may be broadly equivalent, the overall gain may be reduced by the application of indexation.

A FIC is only one of the options available for IHT planning and should be considered in the whole, together with other alternatives which may be more suitable to the family concerned.  A FIC is a long-term vehicle for achieving growth and passing on family wealth.  However, with certainty in respect of shareholders, an element of retained control by the directors and the addition of competitive taxation, these vehicles are certainly an attractive option in IHT planning.

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