A Detailed Guide to Tax Reliefs and Exemptions for FICs

Introduction

Family Investment Companies (FICs) have been a popular tool for families looking to manage and grow their wealth in a tax-efficient manner for some time however they are not as well known to the general public as they are to the high net worth elites. Yet by consolidating assets such as properties, business interests, and investments into a corporate structure, FICs offer significant advantages for succession planning and long-term wealth preservation for any entrepreneur if set up correctly.

A key component of a FICs appeal lies in its ability to leverage various tax reliefs and exemptions, which can reduce liabilities and enhance overall financial efficiency. Simply put the saving of taxes allows a family to reinvest into its businesses and collective assets to enhance and grow them. From inheritance tax (IHT) planning to capital gains tax (CGT) reliefs, understanding the opportunities available is crucial for maximising the benefits of your family’s wealth in an FIC.

However, the tax landscape surrounding FICs is complex, with numerous rules and eligibility criteria to navigate. Missteps can lead to missed opportunities or even penalties, making informed planning essential. This guide provides an in-depth look at the most relevant tax reliefs and exemptions available to FICs, along with practical tips for utilising them effectively.

Whether you’re considering setting up a FIC or looking to optimise an existing structure, this article will help you identify key tax-saving strategies and avoid common pitfalls. By understanding and applying these reliefs, families can ensure their wealth management strategy is both compliant and efficient.

Key Tax Reliefs Available to FICs

Family Investment Companies (FICs) offer a flexible structure for managing wealth, and their appeal lies in the ability to utilise several tax reliefs and exemptions. Properly leveraging these reliefs can significantly reduce tax liabilities and enhance the efficiency of a FIC allowing businesses to grow rather than merely survive. Below is a detailed exploration of the most relevant tax reliefs.

1. Business Property Relief (BPR)

Business Property Relief is a powerful inheritance tax (IHT) relief available for qualifying trading businesses. Depending on the nature of the business, BPR can reduce the value of assets for IHT purposes by 50% or in some cases even 100%.

Applicability to FICs

FICs holding shares in trading companies may qualify for BPR if the company is actively engaged in a trading business rather than investment activities.

Conditions

The assets must have been held for at least two years before they qualify for BPR.

Purely investment-focused FICs (e.g., those only holding investment properties) typically do not qualify for BPR if for example you are outsourcing the day-to-day management to an estate agent and it is a purely passive investment.

However, if you are running the property rental business and carrying out more than 20 hours a week on administration, maintenance and marketing then the properties are considered business asset. Similar with a farmland, if you’re simply renting out the land to a third party that runs the farming business, then you won’t get the Agricultural Property Relief, as the land will be treated as a passive investment.

2. Capital Gains Tax (CGT) Reliefs

CGT is a significant consideration when transferring assets into or managing them within a FIC. Several reliefs can help mitigate this cost.

a. Rollover Relief:

Allows deferment of CGT if the proceeds from the sale of an asset are reinvested in qualifying business assets.

This relief can be applied when the FIC sells a trading asset and reinvests in another.

b. Business Asset Disposal Relief (BADR):

Previously known as Entrepreneurs’ Relief, this allows a reduced CGT rate of 14%, soon to be 18%, on qualifying disposals, up to a lifetime limit of £1 million.

Applicable when selling shares in a trading business, provided the seller meets specific conditions, such as holding at least 5% of shares for two years.

This may benefit shareholders of an FIC when selling their shares, assuming the company qualifies as a trading business.

c. Hold-Over Relief:

Available when transferring business assets into an FIC. This allows CGT to be deferred until you sell the shares in the FIC. The base cost of the asset is applied to the shares when incorporated, so when you sell the shares, the capital gains tax is paid based on the difference between the original purchase price of the business asset and the sale price of the shares. In this example the CGT has been delayed but then BADR is also available to reduce the CGT even further.

Primarily applicable for qualifying business assets, reducing the immediate tax burdens on incorporating into an FIC or passing on a trading business to family either at a discount or outright gift.

d. Substantial Shareholder Exemption (SSE):

The is available to the holding company when they sell shares in a trading subsidiary company, the sale proceeds are free from corporation tax. The funds from the sale can then be reinvested tax-free or used to pay a dividend or redeem shares which is taxable to the shareholder instead. 

Applicable when selling shares in a trading business, provided the selling company meets specific conditions, such as holding at least 10% of shares for two years.

3. Inheritance Tax (IHT) Reliefs

FICs are widely used as a tool for IHT planning, offering several opportunities to reduce liabilities.

a. The Seven-Year Rule:

Gifts of shares can reduce IHT exposure, as they leave the donor’s estate after seven years. 

Careful planning of share distributions can gradually remove wealth from the donor’s taxable estate. This rule highlights the need to plan in advance, as a lot can happen in seven years.

b. Spousal Exemptions:

Transferring shares between spouses is IHT-free, making this an efficient way to redistribute ownership within the family.

These exemptions can be used to balance shareholding and manage tax exposure effectively.

c. Business Property Relief (BPR):

As previously mentioned, BPR can reduce IHT liabilities on qualifying trading businesses held within a FIC.

4. Corporation Tax Reliefs

FICs benefit from the corporate tax system, which often provides significant savings compared to personal taxation.

a. Deductible Expenses:

Operating expenses such as management fees, property maintenance costs, insurance and interest payments on loans are deductible against profits, reducing taxable income. 

b. Interest Payments:

Interest on loans taken out by the FIC to acquire assets can be deducted from corporate profits, further reducing the corporation tax burden unlike buy to let mortgages and loan interest when owned personally.

c. Lower Tax Rates:

Corporation tax is generally lower than higher-rate personal income tax, making it advantageous for generating and retaining income within the FIC. Also, when selling trading businesses shares, a FIC doesn’t pay CGT on the sale due SSE, allowing funds to be invested from the sale tax free rather than after CGT. BADR is still available to the shareholder if the sale proceeds are to buy back shares, so SSE acts like Rollover Relief for FICs. 

5. Stamp Duty Land Tax (SDLT) Reliefs

Transferring properties into an FIC typically triggers SDLT, but careful planning can minimise liabilities. 

a. Relief for Partnerships:

In certain cases, properties held by partnerships may be transferred to an FIC at a reduced SDLT rate, depending on the ownership structure.

b. Commercial Property:

SDLT rates for commercial properties are generally lower than residential properties, making it more cost-effective to transfer these assets into an FIC, however, if they are used by the business, the SDLT can be mitigated.

6. Dividend and Income Tax Exemptions

While FICs may pay corporation tax on their profits, if the trading subsidiaries have paid corporation tax, then the dividends received are not taxed twice for corporation tax purposes. Distributing these profits to shareholders is subject to dividend tax by the individual or entity. However, tax exemptions and thresholds can reduce liabilities:

1. Dividend Allowance - Shareholders can receive up to £1,000 (2023/24 tax year) in dividends tax-free.

2. Basic Rate Taxpayers - Dividends are taxed at lower rates (8.75%) compared to income tax. Families can distribute shares to low-income members to maximise tax efficiency.

3. Retaining Profits - Instead of distributing dividends, FICs can retain profits for reinvestment, avoiding immediate tax liabilities for shareholders and reinvesting, which means the amount invested this way can be 60% larger for higher-rate taxpayers.

Stamp Duty Land Tax (SDLT) Mitigation

Stamp Duty Land Tax (SDLT) is a significant consideration when transferring properties into a Family Investment Company (FIC). It can represent a substantial cost, particularly for high-value properties or those subject to existing mortgages. However, there are strategies to minimise SDLT liabilities while ensuring compliance with tax regulations. 

1. SDLT on Property Transfers to an FIC

When transferring property into an FIC, SDLT is generally payable on the market value of the property, even if it is gifted or sold at a discounted price.

Companies pay a 5% higher rate of SDLT due to the addition charge introduced in Part 4 of the Finance Act (FA) 2003 at 3% but subsequently increased to 5% in the Finance Bill 2024-25 (Autumn Budget 2024)

This can make the process of transferring investment properties into a FIC too expensive to justify, however once the property portfolio is turned into a trading property rental business instead of a passive investment, the SDLT reliefs are available to mitigate SDLT and make the process cost-effective.

2. Partnership Structures to Reduce SDLT

Using a partnership as an intermediary can, in certain cases, reduce or eliminate SDLT when transferring properties into an FIC. This strategy involves the following steps:

• Establish a partnership to hold the property.

• Transfer the property from the partnership to the FIC.

Why It Works

SDLT is generally not charged on the transfer of property from individuals to a partnership, provided they are partners.

The partnership then grows to the point it becomes a trading property rental business rather than a passive or part-time investment portfolio.

Subsequently, the transfers from the partnership to the FIC may qualify for SDLT relief under specific conditions.

Limitations

The partnership must be established for legitimate commercial purposes to grow the property rental business for increased profits.

HMRC closely scrutinises such arrangements to prevent abuse.

3. Transfers of Commercial Properties

FICs holding commercial properties benefit from lower SDLT rates compared to residential properties.

Current Rates

SDLT on commercial properties starts at 0% for properties valued up to £150,000, rising to 5% for values exceeding £250,000.

Mixed-Use Properties

Properties with both residential and commercial elements are taxed at commercial rates, potentially reducing SDLT liabilities.

Planning Tip: Reclassifying properties as mixed-use where applicable can reduce the SDLT burden. For example, a property with a shop on the ground floor and a flat above may qualify

4. SDLT Group Relief for FICs

FICs structured as part of a group of companies may qualify for SDLT group relief when transferring properties between entities within the group.

Eligibility

The transfer must occur between companies that are at least 75% owned by the same parent company.

Exemption

If eligible, SDLT is not payable on the transfer.

Limitations

The relief only applies to transfers within a group, not when transferring properties from individuals to a FIC.

Anti-avoidance rules apply if the group structure is dismantled within three years of the transfer or the new company holding the property is sold rather the individual property, as share stamp duty is lower than SDLT.

5. SDLT Surcharges on Residential Properties

FICs acquiring residential properties must account for the 3% - 5% SDLT surcharge applied to second homes and buy-to-let properties plus companies buying residential properties.

This surcharge applies even if the property is transferred rather than newly purchased. It also applies to partnerships transferring residential investment properties to an FIC.

Strategies to Mitigate

Acquiring commercial or mixed-use properties where the surcharge does not apply.

Retaining properties under personal ownership if the cost of transferring exceeds the benefits.

Or creating an active trading property rental business with five or more residential properties rather a small portfolio of passive or part time investment residential properties.

6. SDLT and Gifted Properties

Even when a property is gifted to a FIC, SDLT may still be payable based on the property’s market value. This is because HMRC treats the gift as a "transaction" involving consideration, as the value of the property will increase the value of the company and who ever owns the company gains the benefit of that value. Therefore, the gift is to the company owners not the FIC as such.

Exceptions

Gifts without any mortgage or other consideration are not subject to SDLT when gift to individuals.

For properties with outstanding mortgages, SDLT is charged on the value of the loan, when gifted.

7. Planning Ahead to Minimise SDLT

Careful planning is essential to reduce SDLT liabilities. Consider these tips:

Timing

Delaying the transfer of properties into the FIC until SDLT liabilities are lower, such as after repaying mortgages or multiple family members form a partnership with enough properties to create a trading property rental business, incorporate into a Limited Company without SDLT and then gift the shares. These shares in a trading business will now have BPR and hold-over relief to gift without CGT and SDLT rather than an investment property which could have SDLT & CGT liabilities.

Asset Selection

Focus on commercial or mixed-use properties, which are subject to lower rates.

Expert Advice

Engage specialist advisors that have knowledge and experience

in SDLT planning to identify reliefs and opportunities specific to your circumstances.

Dividend and Income Tax Considerations

A key aspect of managing a Family Investment Company (FIC) is determining how to handle profits generated by the company. Dividends and income payments to shareholders must be carefully planned to optimise tax efficiency. While FICs offer significant tax advantages at the corporate level, distributing profits can trigger personal tax liabilities for shareholders. Here, we explore the main considerations and strategies for managing dividend and income tax.

1. Dividend Taxation

How Dividends Are Taxed: Dividends distributed by an FIC are subject to personal dividend tax at rates based on the recipient’s income tax band:

• Dividend Allowance: The first £1,000 (2023/24 tax year) of dividend income is tax-free.

• Basic Rate (20% Income Tax Band): Dividends taxed at 8.75%.

• Higher Rate (40% Income Tax Band): Dividends taxed at 33.75%.

• Additional Rate (45% Income Tax Band): Dividends taxed at 39.35%.

Implications for Shareholders:

Distributing dividends to shareholders in higher tax brackets results in higher tax liabilities.

Families can reduce overall tax burdens by distributing shares to lower-income members who pay little or no tax on dividends.

2. Balancing Salary and Dividends

FIC shareholders who are also directors may receive income in the form of salaries or dividends. Choosing the right mix is critical for tax efficiency.

Salaries

Salaries are deductible as an expense for corporation tax purposes, reducing the FICs taxable profits.

Salaries are subject to income tax and National Insurance Contributions (NICs).

Dividends

Dividends are not deductible for corporation tax, meaning they are paid from after-tax profits.

They are not subject to NICs, making them look more tax-efficient than salaries for higher earners. However, if you’re both the owner and employee then as a higher taxpayer there is not much difference between a salary of up to £100,000 compared to a £50,000 salary and £50,000 dividend due to the 19-25% corporation tax.

Once you are over a salary of £100,000 you start to lose your £12,570 personal allowance which slightly tips the balance in favour of dividends verses a £100,000+ salary.

3. Retaining Profits in the FIC

Instead of distributing profits as dividends, FICs can retain income within the company for reinvestment. 

Benefits of Retaining Profits: Retained earnings are taxed at the corporate tax rate, which is often lower than personal income tax rates.

The FIC can use retained profits to acquire new assets, fund investments, or cover operational expenses, promoting long-term growth.

Considerations

Shareholders may face higher tax liabilities when withdrawing retained earnings in the future.

Families should weigh the immediate tax savings against the long-term implications of deferred distributions.

4. Strategies to Minimise Dividend Tax

a. Share Distribution:

Distributing shares among family members in lower tax brackets allows them to receive dividends at lower rates. 

For example, adult children with little or no other income can use their personal allowance (£12,570) and dividend allowance to receive tax-free income.

b. Timing Distributions:

Dividends can be timed to coincide with periods of lower income for shareholders, reducing their tax bracket.

Spreading dividends over multiple tax years can help avoid crossing into a higher tax band.

c. Family Trusts:

Shares can be placed in a family trust, which then distributes income to beneficiaries based on tax-efficient planning. This adds complexity but can offer significant tax savings for high-net-worth families.

5. Dividend and Income Tax in Context

FICs benefit from lower corporate tax rates, but the tax advantage diminishes if profits are frequently withdrawn as dividends by high-tax-rate shareholders. Careful planning ensures the tax benefits of the FIC structure are preserved.

International Tax Reliefs

Family Investment Companies (FICs) are increasingly used for managing international investments, particularly as families diversify their wealth across borders. Navigating international tax regulations and utilising available reliefs are crucial to ensuring tax efficiency and compliance. Here, we explore key international tax reliefs relevant to FICs.

1. Double Taxation Agreements (DTAs)

Double Taxation Agreements are treaties between countries designed to prevent the same income, gains, or profits from being taxed in both jurisdictions.

Application to FICs: Income or gains from investments held in foreign countries may be subject to local taxes as well as UK tax. DTAs help determine which country has primary taxing rights and offer relief to avoid double taxation.

For example, dividends paid from a foreign company to an FIC might be taxed abroad first. Under a DTA, a credit for the foreign tax paid can be applied against the UK tax liability.

2. Withholding Tax Relief

What is Withholding Tax?

Many countries impose withholding taxes on payments such as dividends, interest, or royalties made to foreign investors.

FIC Considerations

Withholding taxes can reduce the net income received by an FIC from foreign investments.

DTAs often reduce withholding tax rates. For instance, the UK-US treaty reduces the withholding tax on dividends paid to UK companies from 30% to 5% in some cases.

How to Claim Relief

To benefit from reduced rates, the FIC may need to provide proof of tax residency in the UK, such as a Certificate of Tax Residency from HMRC.

3. Capital Gains Tax (CGT) Relief on Foreign Investments

Foreign investments sold by an FIC may be subject to CGT in both the country where the asset is located and the UK. Reliefs include:

• DTA Protections: Some treaties allocate taxing rights for gains solely to the country where the seller is resident, reducing the risk of double taxation.

• Reinvestment Reliefs: Certain jurisdictions offer relief if gains are reinvested in qualifying assets within their borders.

4. Controlled Foreign Company (CFC) Rules

What Are CFC Rules?

The UK’s CFC rules aim to prevent companies from avoiding UK tax by holding profits in low-tax jurisdictions.

FIC Implications: If an FIC has subsidiaries in low-tax countries, these rules may apply, potentially subjecting the FIC to UK tax on the profits of the foreign subsidiary.

Careful structuring and adherence to substance requirements (e.g., demonstrating genuine business activity) can mitigate the impact of CFC rules.

Common Pitfalls and How to Avoid Them

While Family Investment Companies (FICs) offer significant advantages, managing tax reliefs and exemptions requires careful planning to avoid costly mistakes. Below are common pitfalls and strategies to mitigate them.

1. Misinterpreting Relief Eligibility

Reliefs such as Business Property Relief (BPR) and Capital Gains Tax (CGT) exemptions often come with strict conditions. Misinterpreting these rules can lead to unexpected tax liabilities.

Mistake

Assuming that all FICs qualify for BPR, when in reality only FICs when more than 50% of their holdings are trading businesses—not investment or passive holdings—are eligible for BPR on the FICs shares when sold or bought back (redeemed).

2. Overlooking SDLT Liabilities

Transferring properties into an FIC often triggers Stamp Duty Land Tax (SDLT), which can be substantial. Families sometimes underestimate these costs or fail to plan effectively.

Mistake

Failing to account for the 3% - 5% and even 15% SDLT surcharge on residential investment properties.

3. Poor Share Structuring

Incorrect share structuring can lead to unintended tax consequences, such as higher dividend taxes or disputes among family members. 

Mistake

Allocating voting shares equally among family members without considering control and tax efficiency.

4. Double Taxation Risks

Mistake

Dividends or profits distributed from the FIC can be subject to both corporation tax and personal income tax, reducing overall tax efficiency.

Seeking Professional Advice

While Family Investment Companies (FICs) offer compelling tax advantages and a robust framework for managing wealth, leveraging these benefits requires expert guidance. The rules surrounding tax reliefs and exemptions are complex, and mistakes can lead to significant liabilities or missed opportunities. Engaging the right professionals ensures your FIC is structured and managed to align with your family’s financial goals.

1. Why Professional Advice Is Essential

Tax reliefs such as Business Property Relief (BPR), Capital Gains Tax (CGT) exemptions, and Stamp Duty Land Tax (SDLT) mitigation are highly nuanced. Misinterpretation of eligibility or procedural errors can result in:

• Unnecessary tax liabilities

• Penalties from HMRC for non-compliance.

• Missed opportunities to maximise savings.

Professionals provide the expertise to navigate these complexities and develop strategies tailored to your unique circumstances.

2. Key Professionals to Consult

Tax Advisors:

• Assess eligibility for reliefs and exemptions.

• Advise on inheritance tax (IHT) planning and profit distribution strategies.

• Commercial Barrister: Draft and review legal documents such as articles of association and property transfer agreements.

• Ensure the FIC complies with corporate governance and legal requirements.

Accountants:

• Prepare financial statements and tax returns to meet compliance standards.

• Provide insight into efficient profit retention and dividend distribution.

Financial Advisors:

• Help optimise asset selection and investment strategies for long-term growth within the FIC.

3. Choosing the Right Advisors

Select professionals with specific experience in FICs and family wealth planning. Look for those with a proven track record in tax law, corporate governance, and intergenerational wealth transfer.