How our client utilised a Family Investment Company (FIC) to make tax savings of upwards of £400K.
££12,500 of tax saved annually by paying for children's schooling via a trust
↓Lower tax rate achieved on a rental property by holding it via the company
££400K reduction in inheritance tax liability to date
↑Potential for further savings as investments within the FIC grow
The situation
Parents owned a profitable trading company with a significant cash reserve which was increasing each year. They wanted to use the profits to benefit and invest in their family as tax efficiently as possible.
Challenges
The aim was to extract the profits from the company without paying any additional tax on dividends, or winding up the trading company. Risks included:
If the company continued to accumulate cash, or use that cash to invest, it may no longer be considered a trading company and any sale of the shares may not attract business asset disposal relief.
Later down the line, any gifted shares to family may be subject to inheritance tax.
When should I consider a restructure?
Our solution
We set up a Family Investment Company (FIC) using a combination of different share rights along with a bespoke shareholders agreement and Articles of Association. This meant that shares could be passed on tax efficiently to the children.
Outcome
The family pay around £15K less income tax than before the structure was set up, and have potentially saved over £600K of inheritance tax with more savings to come as the portfolio of investments in the FIC grows.
Dividends can be paid tax efficiently to the FIC and the parents were able to direct how it was used. This allowed the children's trusts to pay for school and university fees saving £12,500 tax annually compared to the parents extracting the money themselves.
Dividends received from the trading company were reinvested into rental property. Holding the property via the company meant that all of the mortgage interest was tax-deductible. The company also pays a lower tax rate on the rental income than if the parents owned it directly.
As the value of the FIC increased, anything over £1M passed into the shares owned by the children and the trust. This growth dropped out of the parents estate reducing the parents' inheritance tax liability by £400K to date.
The trading company is within business asset disposal and business property relief criteria creating potential inheritance savings of over £800K. It also reduces tax on up to £1M of gain per parent on sale of their shares by 10% (a potential of £100K saving each).