Let’s be honest – paying 40% inheritance tax really does feel like the proverbial “final nail”. That’s why trusts have become a popular choice for passing estates down to the next generation. That said, there’s a possible immediate 20% tax charge on gifting assets into a trust; 10-year anniversary taxes; exit taxes and a hefty 45% tax on any income generated within the trust. A Family Investment Company (FIC) offers a tax-efficient alternative.

Setting up a Family Investment Company (FIC)

A FIC is a company in which family members have shares. If you’re comfortable with how a company operates then it’s worth considering. It is just like any other company and is a tax efficient alternative for passing on wealth without senior family members losing control of it.  

Different classes of shares can be created if the senior family members wish to retain control of their wealth. They have the flexibility of deciding who will have shares; how many shares each person will receive; whether shares will be voting or non-voting and so on.

We’d just like to say that this isn’t “death bed” tax planning and is more of a medium-term plan. It’s ideal if the owner of the family wealth expects to survive the next seven years. 

Putting cash and assets into a FIC

The family members with the wealth can put cash and assets into this company, but it’s also worth noting that if the family owns a trading company with surplus cash, then the trading company could also loan money to the family’s FIC. This avoids the need for shareholders in the trading company to extract the cash personally as dividends, and avoids up to 38.1% income tax on these dividend payments. Great right?

Once cash and/or assets have been transferred into the FIC, it can then be used as a long-term investment vehicle to acquire other assets.