Managing a property portfolio effectively is crucial for preserving and growing wealth across generations. For families with substantial property investments in the UK, establishing a Family Investment Company (FIC) can offer numerous advantages.
FICs can be created from scratch with new portfolios, converted from existing property companies or existing portfolios can be incorporated into an FIC.
This article explores the key benefits of converting your property company into a family investment company (FIC).
1. Tax Efficiency
One of the primary reasons families opt to set up an FIC over personal ownership is the potential for significant tax savings.
- Corporation Tax vs. Income Tax: Rental income generated by properties held within an FIC is subject to corporation tax rather than personal income tax. As of 2024, the corporation tax rate in the UK is 25%, compared to higher rates of personal income tax, which can reach up to 45% for higher earners.
- Full Mortgage Interest Relief: Companies can offset mortgage costs in full, while individuals are restricted to a 20% tax reducer, often resulting in effective income tax rates well in excess of the marginal rates of 40/45% (we’ve seen effective rates of over 100%).
- Capital Gains Tax (CGT): When properties are sold at a profit, an FIC pays corporation tax on the gains rather than the CGT rates faced by individuals. As it stands, CGT rates (24%) are slightly lower than corporation tax rates (25%), but historically CT rates have generally been lower, however most FICs hold property for the longer term.
- Inheritance Tax (IHT) Planning: Shares in an FIC can be structured to enable effective inheritance tax planning. By transferring shares to the next generation, families can reduce the value of their estate, thereby mitigating potential IHT liabilities. Shares can be transferred into trust removing them from the individuals’ estates and providing significant asset protection.
2. Asset Protection and Control
An FIC allows for enhanced control over family assets while providing a robust structure for asset protection.
- Control Retention: Founders can retain control over the company through different classes of shares, enabling them to manage the property portfolio while gradually transferring ownership to younger generations.
- Protection from Personal Liabilities: Properties held within an FIC are separate from personal assets, offering a layer of protection against personal creditors.
- Use of trust and other similar structures: Ownership of the shares can be held in trust, which can provide protection from divorce, debt and inheritance tax.
3. Succession Planning
Effective succession planning is crucial for ensuring the smooth transfer of wealth across generations.
- Structured Ownership: An FIC facilitates structured ownership transfer. Different classes of shares can be issued to family members, each with varying rights and restrictions, helping to manage family dynamics and ensure that control remains with the intended individuals.
- Continued Management: An FIC ensures that property management expertise remains centralized, providing continuity in the administration and strategy of the property portfolio.
4. Flexibility in Profit Distribution
An FIC offers flexibility in how profits are distributed among family members.
- Dividend Policies: The company can adopt dividend policies that suit the needs of the family, distributing profits in a tax-efficient manner. This flexibility allows for strategic planning to minimize tax liabilities for individual family members.
- Reinvestment Opportunities: Retained earnings can be reinvested within the FIC to expand the property portfolio or diversify into other investments, supporting long-term wealth growth.
- Tax efficient School Fees: Dividends distributed into trust could be used to fund nursery/school/university fees in a tax efficient way.
5. Professional Management and Governance
Running a family investment company encourages the adoption of professional management practices and governance structures.
- Board of Directors: Appointing a board of directors, including non-family members if desired, can bring professional oversight and diverse expertise to the management of the property portfolio.
- Formal Governance: Establishing formal governance structures, such as regular board meetings and financial reporting, ensures transparency and accountability in managing family assets.
6. Privacy
Holding properties within an FIC can offer a level of privacy that is not available when properties are held personally.
- Anonymity: The beneficial owners of the properties can remain private through the use of trusts and nominee shareholdings, as the ownership is vested in the company rather than individuals. This can be advantageous for high-net-worth families who prefer discretion.
Conclusion
Establishing a Family Investment Company in the UK offers a multitude of benefits for managing a property portfolio. From tax efficiency and asset protection to succession planning and professional management, an FIC provides a robust framework for preserving and growing family wealth across generations. Families with significant property investments should consider the strategic advantages of an FIC to optimize their financial planning and secure their legacy.
If you are contemplating establishing an FIC for your property portfolio, or converting your existing company please drop us an email to discuss how we can help with this info@fusionpartners.co.uk or book an initial consultation here: www.fusionpartners.co.uk/book