FICs have similar governance and compliance requirements as companies in that they must submit annual accounts, corporation tax returns and statutory declarations to HMRC and Companies House.
Stambach says the types and nature of shareholdings differ from conventional company structures. They use “alphabet shares”, a class of shares owned by a proprietary business and geared towards future growth. For instance, FICs established by a mum and dad will see one parent holding A shares and the other B shares. An additional share class known as C shares are held either directly by their children or by a trust for the children’s benefit.
Family businesses issues to consider
Stambach says A, B and C shares have voting and dividend rights. A and B shares have capital rights that are capped at a specified amount whereas C shares have capital rights above this amount.
C shares are “more laborious” to issue, with multiple classes of shares to be issued to each child. There is a risk of divorce or bankruptcy reducing the wealth generated in this structure and present challenges of paying multiple dividends to each C shareholder.
Trusts allow income to be paid to a pool of beneficiaries, with mum and dad shareholders as trustees. They protect against divorce or bankruptcy because the assets they hold are protected. They are also easier to maintain because they cover one class of shares as opposed to multiple classes. However, Stambach says trusts can be an administrative burden to meet HMRC-compliance requirements.
FICs can be funded by either share capital subscription or loans, which are more popular for allowing future repayments back to mum and dad shareholders from future company profits. In most cases, they loan the money to the company or dispose of a personally held asset into the company. “Issuing a new class of shares makes C shares worthless,” Stambach says. “HMRC seeks to argue C shares have inherent value that benefit from dividend and future growth. It’s a tough argument (based on) speculated increase in value.”
Investment assets help reduce tax burden
Stambach says “clients that already have investment assets to remove from their personal ownership reduce the tax burden on the income from 40 to 45 per cent to 25 per cent”. This helps with long-term inheritance tax.
However, he cautions there could be “issues putting things in companies” in attracting capital gains tax (CGT) and stamp duty land tax (SDLT).
Transferring an asset from your personal ownership to a company you control is deemed to be selling the asset at its market value. The company is required to pay SDLT on the value of the land and property being transferred into the company. Stambach says despite the CGT and SDLT being potentially substantial, the company shareholder could receive an IOU from the company and draw from this tax free over time. “Short-term pain for long-term gain,” he says. “Every circumstance is different. Sometimes people have property portfolios and worry about inheritance tax issues,” he says.
A FIC structure with a discretionary trust for the growth shares requires both company and trust compliance to be completed annually. Companies are required to submit annual:
- Accounts
- Corporation tax returns
- Annual returns
- Confirmation statements
Trusts are required to:
- Submit an annual trust return to report any income received and distributions made;
- Complete and pay exit and 10-year anniversary charges on the value of assets held in the trust on the distribution of capital or every 10 years (whichever comes first); and
- Maintain details with the Trust Registration Service.
Stambach labelled the process of making payments to trust beneficiaries as the “trust tax merry-go-round”. However, the “main benefit of the FIC structure is the potential inheritance tax saving it can deliver upon death”, he says.
Creating a growth share structure, whether it be via multiple share classes or a single class held in a trust, means the majority of the company value would not fall within the individual’s estate for inheritance tax. “Only the capped value of the individual’s shares is within the estate,” he says.
FICs have many benefits, according to Stambach. They keep “investment activity wrapped up in one corporate investment vehicle”, pay corporate tax at 25 per cent on income and gains and allow “family wealth to be created in an inheritance tax-friendly environment”. “They give control and flexibility to owners on what assets to invest in and whether to draw income and make loans or not.”
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