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Family investment companies: The best way to get a good return on savings?

PUBLISHED: 11:49 23 March 2017 | UPDATED: 10:14 30 March 2017

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With trusts no longer having the tax advantages they once did, are family investment companies now the best way to get a good return on family savings?

With trusts no longer having the tax advantages they once did, are family investment companies now the best way to get a good return on family savings?

Families can be forgiven for not knowing where to turn once they have taken advantage of ISAs and pension allowances. The tax free dividend allowance will certainly be helpful; however, as the rates of dividend tax have increased, many higher income families may well be worse off overall. Similarly, beginning in April 2017, many individuals who let residential property will see tax bills rise as relief for mortgage interest is gradually withdrawn over the next few years.

Trusts used to be the standard way of passing family wealth between generations without relinquishing control over assets. Although trusts still very much have their place as a wealth protection vehicle, many of the tax benefits have eroded over the years, with administrative burdens increased.

An increasingly popular alternative over recent years has been to set up a family investment company. These can provide similar practical advantages to trusts; assets can be protected and wealth passed down the generations without relinquishing control. However, they can be established and managed by a very simple, common structure in the form of a single private company.

The company would typically be run by the parents as directors, with family members such as children owning the shares. Decisions would be made by the directors and there are very few restrictions on the types of investment which can be made, meaning that the investment company can be used to hold anything from rental properties to share portfolios and investment funds. There is flexibility around the extraction of profits and, being an unregulated entity, costs can be kept relatively low.

The company can generally be funded tax free, and investments can grow at lower rates of tax, or even free of tax in the case of UK (and some overseas) dividends. Income and gains arising in the company will be subject to corporation tax, which is currently 20%, but due to reduce to 17% by 2020. Capital gains of a company are calculated after increasing the cost of disposed assets by an inflation factor. This is a feature unavailable to individuals, who will also suffer a top rate of tax on income of 45%.

There will be running costs and set up costs for the company; it would need to prepare accounts and corporation tax returns and there can also be an additional tax point when funds are extracted. However, all these can be planned for so that in the right circumstances the company can pay for itself many times over in the long run.

(Note that tax rates and rules are correct at the time of writing, which is in advance of the Spring Budget).

Smith & WilliamsonSmith & Williamson

smithandwilliamson.com | LinkedIn | Twitter | Edward Emblem - 01483 407139 edward.emblem@smithandwilliamson.com

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing. The tax treatment depends on the individual circumstances of each client and may be subject to change in future. Smith a Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.

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