A trend was created by Chancellor Rachel Reeves following last Autumn’s Budget which saw a large number of family investment companies (FICs) established.
Ultimately, the strategy involves a focus on cutting IHT following a surge in demand from high net worth individuals for FICs after the budget’s move over pensions.
Junaid Afzal, a Commercial Director and Independent Financial Adviser with Haven Financial Planning says “admittedly, there are two sides to the coin but I would err on the side of caution in creating a FIC. Why? Well, there are prohibitive costs and then there are the complexities of investment vehicles designed to reduce inheritance tax. The assets under discussion may also be incompatible too.
“In addition, there are reporting requirements and costs associated with ongoing legal accounting, financial advice and investment management.”
Junaid maintains that capital gains realised by FICs are chargeable to corporation tax at up to 25%, even higher than the current maximum 24% for individuals.
“If you are unaware, from 2027, pension pots will be assessed for IHT purposes and potentially subject to an IHT charge of 40%.
“Further, some of those people owning land banks may also be subject to a 20% tax charge.”
Junaid ask: “So what are the plus points?”
He says there are many, potentially. “FICs can be used to hold wealth and gift shares without incurring upfront IHT charges. This requires the benefactor to live for seven years after the transaction..
“Plus, they provide different share classes. This enables parents and guardians to maintain control of any assets while children possess economic ownership.
“Given the set up costs and standard fees, a good minimum would be a figure of around £2m. They can serve as an effective structure to pass on wealth in a tax efficient, protected way for future generations.”
Some would argue too that FICs can make administration of assets for executors easier when dealing with the estates of deceased relatives.
“They are liable to be placed in one account thereby avoiding the handling of multiple investment accounts. It’s not a policy for everyone though in mitigating IHT exposure.”
