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LEGAL COLUMN: Ways you can mitigate your tax liabilities

Amanda Simmonds, families specialist at Lupton Fawcett.
Amanda Simmonds, families specialist at Lupton Fawcett.
Promoted by Lupton Fawcett

Family Investment Companies or FICs are becoming an increasingly popular way to hold investments.

If a wealthy individual (let’s call him Mr W) has cash, investments or property worth £5m, his income will be taxed at 45 per cent and capital gains will be taxed at 20 per cent (28 per cent on residential property).

Formation of an FIC and the transfer of assets into it in return for a loan account produces a different scenario. The income and capital gains payable by Mr W would be replaced by corporation tax at lower tax rates and he could withdraw monies from the FIC by reducing his loan account which would not be taxable. And increases in the investment portfolio’s value (helped by the lower rate of tax) could accrue to his family by issuing capital-bearing shares to them. Mr W could maintain control by having shares giving the right to determine the constitution of the board of directors and so have management control.

It is not all good news, however. There are administration costs involved in setting up a company and ongoing regulatory costs. Accounts and documents setting out share class rights together with details of the shareholders need to be filed at Companies House which means that some information relating to the family is in the public domain.

Furthermore, the new tax rate on dividends will mean that it is more costly for shareholders to extract money by way of dividend and if the FIC is liquidated, there is a double capital gains tax charge (both within the company and on the individual shareholders) if the investment portfolio increases in value.

It may be worth therefore looking at other options, such as trusts, where the trustees hold investments on behalf of family beneficiaries. This can be useful in conjunction with an FIC if, for instance, Mr W had infant grandchildren.

Other more esoteric solutions are private unit trusts or open-ended investment companies (OEICs). The administrative costs are high but the investments within OEICs can be changed without liability to capital gains tax, although redemption of units or withdrawals from the OEIC are likely to be taxable.

There are also family limited liability partnerships, if there are a number of beneficiaries who require regular distributions. Unlimited companies may be useful because their filing requirements at Companies House are very much reduced. Although the benefit of limited liability is lost, if the investment strategy is prudent, this may not be a concern.

Amanda Simmonds, families specialist, tel: 0114 276 6607 or Amanda.simmonds@luptonfawcett.law