Although Family Investment Company's (FIC) have been around for several years, awareness of the flexibility that such a vehicle affords has been growing in recent years. The use of such companies is particularly attractive to director-owners of family businesses who have children, enabling parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.
What is a FIC?
A FIC is a bespoke vehicle which can be used as an alternative (or in addition) to a family trust. It is a private company that invests rather than trades (the investments typically being equity portfolios or property). The shareholders are family members taking advantage of the use of Alphabet shares enabling each direct descendent family member to be allocated a different class of share.
Usually a FIC is set up with a founder share held by the individual(s) providing the capital, being either a cash loan or assets where no chargeable gain has yet to accrue. If a cash loan, the FIC uses the money to acquire assets (e.g. property), which generate a return. Such income is either re-invested within the FIC or can be used to repay the original loan tax-free.
'Alphabet shares' enables family members to have different levels of control over company decisions, rights to receive dividends and entitlements to the company's capital value. In the incorporation of a FIC, the individual setting up the company could still be a Director and preferential Shareholder holding 'A' shares. Such a shareholder will have the right to appoint a director and vote at general meetings (and therefore hold control of the company), however, they must have no entitlement to dividends or to any return of capital. Other family members and often family trusts are then brought in as shareholders, each holding one ‘B’ share each. These ‘B’ shares have no voting or control rights but full entitlement to any dividends and/or return on capital. The shares can be held in trust if the child is a minor.
Benefits of a FIC
· should assets rather than a cash loan by transferred into the FIC, after seven years the value of the money or property transferred falls outside the transferors' estate for IHT purposes. However, it is important that no beneficial interest in the company is held.
· there is no upper limit in the value of assets that can be placed into a FIC whereas there is a limit of £325,000 in placing capital into a Lifetime Discretionary Trust before any IHT is charged. Any value transferred into a trust above this amount is taxed at 20%.
· being a company a FIC is subject to corporation tax on the income received which (currently) is at a lower rate than income tax. Where the property is residential mortgage interest is fully reclaimable and not restricted to the basic rate tax credit as applied to personally held buy-to-let property holdings.
· the company shareholders will be liable to tax when profits are extracted. However, a FIC offers the possibility of allocating dividend payments, which could potentially be spread amongst family members tax-efficiently;
· the company's article of association can be set up to include specific clauses that protect the shares in specified circumstances (e.g. by preventing shares from being transferred outside of the family.)
Tax trap
Transferring assets (as opposed to cash) into a FIC can have CGT consequences for the donor and/or Stamp Duty Land Tax in the case of property used to subscribe for shares in the company. As such these costs can render the use of the FIC structure prohibitive.
If you would like to find out more about FICs, get in touch.
Business Property Relief (BPR) is an attractive inheritance tax (IHT) relief that could provide 100% tax relief in respect of qualifying assets relating to both lifetime transfers of business assets or in the death estate, providing, of course, certain provisions apply. Different conditions apply depending on whether the assets are transferred during the donor's lifetime or on death.
BPR works by offsetting the value attributable to the 'relevant business property' when calculating the taxable estate by a percentage of either 50% or 100% (depending on the type of business property) as follows:
· Unincorporated business 100%
· Controlling holding of unquoted shares 100%
· Any unlisted, unquoted shares 100%
· Controlling holding of quoted shares 50%
· Certain assets used in a business 50%
Shares in an unquoted trading company
Such shares should qualify for BPR in full, providing the shares have been held for at least two years and there is no binding contract in place to sell the shares. However, where there is more than one shareholder of a private limited company, understandably many such shareholders have a binding agreement to ensure the company's continuity. Such agreements state that should a shareholder die, their personal representatives are required to sell the shares to the surviving shareholder(s). If such a binding agreement is in place then the shares will not qualify for BPR because the personal representatives are no longer considered to own the shares. Where this happens the value of the right to receive the proceeds is included in the estate, and is taxable in full as the right is not 'relevant business property'.
Practical point
Rather than having a binding agreement, the agreement should be made optional, providing the estate with an option to sell, and the remaining shareholders the option to buy. Care should be taken that the agreements are not made on the same day (or nearly the same day) otherwise HMRC could deem the agreement to be an ordinary agreement for sale. The termination dates for the estate’s and the shareholders’ options need to be different.
Land and buildings
Many company's operate out of land or buildings owned by a shareholder personally. Such assets also do not automatically attract BPR; they are only 'relevant business property' where the transferor controls the company. As a 50% shareholder does not control a company, BPR will not apply. A planning point will be to ensure that should BPR be required that the shareholder must retain at least 51% shareholding.
Furnished holiday lets
For income tax purposes the operation of a furnished holiday let (FHL) is deemed to be a business and not a property income investment. As such any qualifying FHL qualifies for capital gains tax relief on sale under Business Asset Disposal Relief. However, just because the lettings are deemed a business for income tax and CGT purposes does not mean that the business also qualifies for BPR. HMRC’s view is that furnished holiday lets generally do not qualify for BPR stating that income derived from such businesses largely comprises rent in return for the occupation of property and as such is an investment rather than a trading business. However, they appreciate that there may be some cases where the level of additional services provided is 'so high that the activity can be considered as non-investment', and, as ever, 'each case needs to be treated on its own facts'.
Therefore, to succeed in a claim for BPR the burden of proof must necessarily be greater than required for either income tax or CGT. HMRC is more likely to allow relief where the lettings are short term (e.g. weekly or fortnightly) and the owner (either themselves or a relative or housekeeper) has been substantially involved with the holidaymaker(s) in terms of their activities on and from the premises even if the lettings were for part of the year only. Merely providing maintenance, cleaning, etc. will not be enough. HMRC's guidance states that the business needs to be looked at 'in the round' when deciding whether 'the holding of property as investment was the main component of the business. If it was not, then the business was entitled to business relief'.
If you would like help and advice on this area, please don’t hesitate to get in touch.
If you own a furnished holiday letting, there are a number of advantages available to you in terms of tax which are not available to standard residential lettings.
One of the key advantages is in reference to the treatment of interest and finance costs, let me explain more…
Relief restriction for owners of standard residential lettings
Did you know that residential landlords can now only obtain relief for interest and finance costs, such as mortgage interest, as a basic rate tax reduction, regardless of the rate at which the residential landlord pays tax?
The interest and finance costs incurred are not deducted when working out the taxable profit, so the tax is initially worked out on the profit without taking account of the interest and finance costs.
The tax liability is then reduced by 20% of the interest and finance costs, capped at the lower of 20% of the taxable profit or the amount that reduces the tax liability to nil.
Any unrelieved interest and finance costs can be carried forward for relief as an income tax deduction in calculating the tax liability of the same property business in a later tax year, with the costs being relieved at the first available opportunity.
This approach has a number of downsides – relief is only given at 20% even if the landlord is a higher or additional rate taxpayer and relief may not be given in full in the tax year in which the costs are incurred.
Deduction in full for furnished holidays letting owners
The changes to interest rate relief do not apply to furnished holiday lettings, and where a let qualifies as furnished holiday let, interest and finance costs can be deducted in full when working out the taxable profit.
Unlike standard residential lettings, the deduction is not capped, and can give rise to a loss which may be carried forward and set against future profits from the same furnished holiday business.
Also, as relief is by deduction, relief is given at the landlord’s marginal rate of tax not at 20% where the landlord is a higher or additional rate taxpayer.
Here’s an example to illustrate this:
Helen is a residential landlord.
For 2021/22 her taxable profit before taking account of interest costs on the associated mortgage is £30,000.
Mortgage interest paid in the year is £8,000.
Helen has other income from her photography business and pays tax at the higher rate of 40%.
Before applying the basic rate tax reduction, the tax on the property income is £12,000 (£30,000 @ 40%). The basic rate tax reduction in respect of the mortgage interest reduces this by £1,600 (£8,000 @ 20%) to £10,400.
Mark has a furnished holiday letting on which profit before deduction of interest costs is also £30,000.
He too pays mortgage interest of £8,000 and, like Helen, has other income and is a higher rate taxpayer.
However, unlike Helen, he can deduct the full amount of the mortgage interest, reducing the taxable profit to £22,000, on which tax of £8,800 (£22,000 @ 40%) is payable.
Despite identical profit and interest, Mark pays £1,600 less in tax than Helen as he is able to obtain relief for his interest costs at his marginal rate of 40%.
If you own a furnished holiday let and would like to find out more, get in touch. We can talk through this advantage and look at what other advantages may be applicable to you.
If you own a furnished holiday letting, there are a number of advantages available to you in terms of tax which are not available to standard residential lettings.
One of the key advantages is in reference to the treatment of interest and finance costs, let me explain more…
Relief restriction for owners of standard residential lettings
Did you know that residential landlords can now only obtain relief for interest and finance costs, such as mortgage interest, as a basic rate tax reduction, regardless of the rate at which the residential landlord pays tax?
The interest and finance costs incurred are not deducted when working out the taxable profit, so the tax is initially worked out on the profit without taking account of the interest and finance costs.
The tax liability is then reduced by 20% of the interest and finance costs, capped at the lower of 20% of the taxable profit or the amount that reduces the tax liability to nil.
Any unrelieved interest and finance costs can be carried forward for relief as an income tax deduction in calculating the tax liability of the same property business in a later tax year, with the costs being relieved at the first available opportunity.
This approach has a number of downsides – relief is only given at 20% even if the landlord is a higher or additional rate taxpayer and relief may not be given in full in the tax year in which the costs are incurred.
Deduction in full for furnished holidays letting owners
The changes to interest rate relief do not apply to furnished holiday lettings, and where a let qualifies as furnished holiday let, interest and finance costs can be deducted in full when working out the taxable profit.
Unlike standard residential lettings, the deduction is not capped, and can give rise to a loss which may be carried forward and set against future profits from the same furnished holiday business.
Also, as relief is by deduction, relief is given at the landlord’s marginal rate of tax not at 20% where the landlord is a higher or additional rate taxpayer.
Here’s an example to illustrate this:
Helen is a residential landlord.
For 2021/22 her taxable profit before taking account of interest costs on the associated mortgage is £30,000.
Mortgage interest paid in the year is £8,000.
Helen has other income from her photography business and pays tax at the higher rate of 40%.
Before applying the basic rate tax reduction, the tax on the property income is £12,000 (£30,000 @ 40%). The basic rate tax reduction in respect of the mortgage interest reduces this by £1,600 (£8,000 @ 20%) to £10,400.
Mark has a furnished holiday let on which profit before deduction of interest costs is also £30,000.
He too pays mortgage interest of £8,000 and, like Helen, has other income and is a higher rate taxpayer.
However, unlike Helen, he can deduct the full amount of the mortgage interest, reducing the taxable profit to £22,000, on which tax of £8,800 (£22,000 @ 40%) is payable.
Despite identical profit and interest, Mark pays £1,600 less in tax than Helen as he is able to obtain relief for his interest costs at his marginal rate of 40%.
If you own a furnished holiday let and would like to find out more, get in touch. We can talk through this advantage and look at what other advantages may be applicable to you.
