The simple answer, it is an ordinary company registered in England and Wales and resident for tax purposes in the UK.
What makes it different, is that the shareholding is held by family members for the purposes of investing family wealth. The original purpose of FICs was to reduce inheritance tax by providing a vehicle where surplus capital growth could be passed on to the next generation, whilst maintaining control over the funds. However, with the falling rate of corporation tax made FICs also attractive for those wanting to grow wealth in a more tax-efficient vehicle.
A typical ownership example of a basic FIC would be, Mum – 25%, Dad – 25%, Son – 25% and Daughter -25%.
In this example, Mum and Dad have formed the company and given away half of the company to their children. I am assuming that the company was established for cash and the shares given away on incorporation; so no tax will have arisen.
Mum and Dad are both directors and they will control all day to day activities of the company. The FIC invests the original capital invested by Mum and Dad with the growth being taxed at corporation tax rates, with half the growth belonging to the children, further saving inheritance tax.
If profits are paid out of the company as distributions, then further tax will be payable, but what, when and how much is paid out, is totally controlled by Mum and Dad.
However, I would not recommend using a basic form of a company, as it misses many opportunities to create a structure that offers greater control, protection, flexibility and tax efficiency.
This is the first in a series of articles on FICs. In subsequent articles I will explore:
Share capital and share transfers.
Shareholders agreements and corporate governance.
Dividends and settlements legislation.
Funding an FIC and other tax issues.
Use of trusts and protection of wealth.
If you are interested in discussing whether a FIC would be right for your family, please get in touch for a free non-obligatory discussion by emailing email@example.com.
Article by Simon Howley ATT CTA ATA AFA MIPA