In our third article on Family Investment Companies (FICs), we look at the common ways to get the FIC off the ground and allude to the anti-avoidance tax legislation that is there to trap the unwary…
FIC’s are usually funded in one of the following ways:
Gifts to the company
Sale of Assets
Share for Share exchanges
Cash is the most common and is introduced into the FIC by simply subscribing for shares. Nothing remarkable there.
All companies issue share capital on incorporation, normally £1 Ordinary Shares, and these will always be acquired for par value. After incorporation, there is nothing stopping the directors issuing additional or new shares at a premium. For example, nominal value of £1 each, can be issued at £2, with £1 being the share premium.
No tax issues will arise on share subscriptions at par value or at a premium on or near incorporation, and the price paid will form the base costs for capital gains tax purposes of the shareholder.
Where parents or grandparents establish a FIC, they would usually subscribe for the shares and make a gift to the children/grandchildren, or have the children/grandchildren subscribe directly to the FIC on the understanding that they will be way the subscription price.
Any gifts between connected individuals will be at market value and will also be a disposal for capital gains tax purposes. Therefore, it is important to consider share valuations to determine the correct price of any share gifted.
Assets can be gifted to a FIC, but it is important to understand that any gift to a company is a chargeable life time transfer for inheritance tax purposes, chargeable at 20%. However, if the FIC is wholly owned by the donor, then it can be argued that there is no reduction in the donors estate, so that no inheritance tax is payable.
If cash is not available, then consider selling an asset to the FIC, in exchange for an IOU or an issue of shares.
For example: let’s say John has a commercial property that he wants to give to his children, but he wants to retain control over the property, so that rental income can be accumulated and used for future investment opportunities.
John can establish a FIC, and agree to sell the property at market value to the FIC. This will be a disposal for capital gains tax purposes and SDLT will also be payable by the FIC. The consideration is left outstanding as a debt. John can then assign the debt to his children who can then subscribe for shares and agree to set of the debt as the subscription price. This will be a potentially exempt transfer for inheritance tax purpose for John, so no tax would be payable so long as he survived 7 years. John will of course have structured the FIC who that he is the director (along with any spouse) and will be in control of any investment decions.
Once a FIC is established, it can also look to enter onto commercial arrangements to acquire shares in other companies for an issue of shares in itself. So long as the rules for reorganisations are satisfied, there will be no disposal. Advanced clearance from HMRC should always be sought on any such proposed transaction, but so long as the FIC holds 25% or more of the ordinary state capital of the target company and the transaction is carried out for genuine commercials reasons, clearance should be given.
Loan are clearly a very simple way to fund a FIC because they are flexible and repayable on demand, but they do come with their own tax avoidance issues, which I will not ago into now.
So by now it should be abundantly clear that before any investment is made in a FIC, careful consideration needs to be taken of the anti-avoidance legislation.
I will cover the anti-avoidance issues of establishing a FIC in my next article, but it should be clear from the outset, that careful planning needs to undertaken before a FIC is established.
Article by Simon Howley ATT CTA ATA AFA MIPA