The use of limited companies as investment vehicles is nothing new - people have been doing this for years, for a variety of reasons. 

Property portfolios are often held within a company structure because it can help to manage the ongoing tax liabilities that come with property ownership. Land and other large tangible assets can also be more easily divided into smaller shareholdings through ownership in a company.

Increasingly however, there has been a rise in the use of investment companies as a means of transferring wealth from one generation to another, known as “Family Investment Companies" (FICs). This caused HMRC to open a specialist unit to investigate the risks of potential loss of tax revenue from these structures, but in August 2021 they closed the unit down, surmising that “there is no correlation between the use of FICs and the failure to report one’s tax affairs correctly”.

In essence, what they are saying is that, done properly, this is a perfectly legitimate way of mitigating potential taxes.

So how does it work?

As you might expect, there’s no “one size fits all” approach to this potentially quite complex area of financial and tax planning. But let’s go over a very high-level summary of what might be involved:

• A new limited company is incorporated and a shareholder structure created to suit the needs and circumstances of the individuals involved.
• Money is transferred into the new company by way of a Director’s Loan or Share Capital (or both).
• The Directors of the company invest the money for growth or income (or both).
• Profits may be used to pay dividends to shareholders and/or to repay any loans given.

Who owns the company?

Like any other limited company, the shareholders own it. The shareholders could be the individuals looking to transfer their wealth, other family members, trusts, or even other companies.

To be effective as a means of transferring wealth from one generation to another, there has to be some form of transfer of value. That could be in the form of gifting shares or Director’s Loans.

This part of the process is really important to get right so specialist tax and legal advice is an absolute must, to ensure the structure of the company achieves what you’re setting out to do.

Why is it popular?

FICs are effectively an alternative to trusts. Trusts can have more limitations around how much you can put in them, and trust tax rates can be more punitive too. But, like trusts, FICs can offer a way of transferring wealth without giving up all control of that wealth, and that’s often what makes them attractive.

Another reason is that many people feel more comfortable with a company structure than a trust structure. If you’ve been in business your whole life, for example, you’re likely to understand how companies work. You’re a lot less likely to understand how trusts work.

What are the downsides?

Like almost anything in life, there are cons as well as pros. Costs are an obvious one. Setting up the right structure for you isn’t likely to be cheap, so FICs tend to work better for relatively high value transactions (seven figure sums, at least) where economies of scale come in.

And then there’s ongoing running costs too, because you’ll need to prepare annual accounts and submit Corporation Tax returns.

It is also worth bearing in mind that there is definitely an element of complexity involved too. As well as getting your head around share structures, Director’s Loan Accounts and company law, you’ll need to understand what investments the company is going to hold and how these are taxed.

How do I know if it’s right for me?

In short, seek professional advice: financial advice, tax advice, legal advice and investment advice.  Think about what it is that you want to achieve and explain this clearly to your advisers. They’ll then be able to assess your circumstances and objectives and tell you whether a FIC is right for you or not. If it is, they’ll then be able to give you specific and bespoke advice on creating a FIC that does what you need it to do.

Find out more

if you’d like to discover more, please don't hesitate to get in touch with myself or a member of our Wealth team.

Disclaimer: Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority. 

This communication should not be read or considered as financial advice. While all possible care is taken in the preparation of this communication, no responsibility for loss occasioned by any person acting or refraining from acting as a result of the information contained herein can be accepted by this firm.

This communication is based on our understanding of tax legislation as at 14/09/22. The value or benefit of any specific tax reliefs or allowances will depend upon your own situation.  The financial conduct authority does not regulate tax and estate planning.