Family Investment Companies and the desire to mitigate IHT on inherited pensions

Following forthcoming changes to unspent pensions announced in the Autumn Budget 2024, particularly how they will become subject to inheritance tax (IHT) from 2027, advisers have increased their focus on finding alternative strategies for their clients to pass assets down the generations. This has resulted in a rise in popularity of Family Investment Companies (FICs).

In research conducted by the lang cat, while many advisers were considering the increased utilisation of gifting, trusts and onshore bonds to redirect inherited wealth, nearly four in 10 respondents took another view, including exploring the use of FICs.

A FIC is just a simple company, operated as a tax-efficient way of passing down wealth in families instead of a trust. Of course, clients are best served by obtaining specialist professional advice on the merits of using a FIC for this purpose, but it’s well worth taking a look here at the potential benefits of this family wealth-conserving avenue.

Where to start

There are flexible ways of setting up a FIC. Either just keeping it straightforward with ownership shares distributed to chosen family members, or issuing different classes of shares to suit different needs. The company can be established under limited or unlimited liability. While limited companies are advantageous structures for most, an unlimited company ensures privacy as it’s not obliged to file annual accounts at Companies House, so its financial position can’t be accessed by third parties.

The act of transferring company shares to younger family members will reduce the donor’s estate value, as these gifts are free of IHT as long as the donor survives for seven years. The FIC’s directors retain decision-making control via their voting shares, ensuring the donor can oversee the company while reducing their taxable estate. Therefore, structured correctly from the outset, having a FIC reduces the liability for IHT.

Why FICs?

With wealth deployed in the FIC, the company can manage stocks, bonds, cash, property and other investments. Investment returns within the FIC attract lower rates of tax than an individual investor would pay. When corporation tax applies, currently it is levied at 25%, which is significantly lower than the top rates of income tax. In this way, higher after-tax profits can be reinvested. Note too that most dividends received by a UK company are exempted from corporation tax.

Another advantage is the FIC can claim a corporation tax deduction for interest paid on loans taken out against the value of its investments, where these loans are used for the purposes of the company’s business (for example, buying new shares or managing its affairs).

In fact, expenses incurred by the FIC in managing its investments and running the business will be eligible for corporation tax relief. This could include investment managers’ fees and remuneration paid to directors and employees. But some items are not eligible for such relief, such as entertaining.

When it comes to extracting profits for passing to family members, the tax implications may result in the recipients paying the same rate of tax that an individual who invests directly would pay, or an even higher rate. Consequently, a FIC is best viewed as a long-term estate planning tool with the goal of building wealth for future generations, rather than a vehicle for making investment returns to be extricated and spent in the short term.

Furthermore, if income generated by the FIC is kept inside the company, and only taxed at corporate level, the personal tax liabilities for shareholders will be deferred. Shareholders can then decide when to receive income, perhaps to coincide with a lower tax bracket that brings tax savings.

Where to go

The 7IM platform is well placed to be able to help with the administration of the investments chosen for the FIC. The platform can open corporate accounts for FICs and it provides access to a wide range of investments and discretionary investment managers. The account can also be split into ‘sub accounts’ to be able to manage different pots with potentially different time horizons and risk profiles. The FIC account can also be linked to individual family members’ 7IM accounts to aggregate and reduce the overall platform charges.

It’s worth highlighting that HMRC has examined FICs to understand how they are being used, and as things stand, this has not resulted in any legislative changes affecting FICs – but it’s possible that changes could come in future. Accordingly, and because there are quite a few aspects that need to be carefully considered before opting for the FIC route, including set-up and running costs, a family is strongly recommended to seek professional advice from tax and legal experts as a first step.