Use of a Family Investment Company

Family Investment Companies (FIC) offer a tax efficient way to retain control over assets and still pass them on to the next generation. By providing a degree of flexibility they can be ‘fine-tuned’ to a family’s particular circumstances or requirements e.g. by drafting the company’s articles in such a way as to prevent the transfer of shares outside of the family.

For many people a trust is the most flexible way to achieve the same goal as the lifetime IHT threshold of £325,000 per individual is sufficient to mitigate potential tax liabilities, however, assets worth more transferred to a trust would be subject to an immediate IHT charge. A FIC enables a transfer of value above the IHT threshold without suffering a tax charge whilst still retaining control of assets. The main downside of a FIC is that the shares have to belong to someone whereas a trust can have beneficiaries that are still to be born (although shares can be held by a trust to benefit future grandchildren for example).

The method of setting up a FIC is the same as when incorporating any other company limited by shares, the difference being in the designation of those shares. For example, a donor (e.g. parent) would own one ‘A’ share with the right to appoint one director and the right to vote at general meetings but with no entitlement to dividends or any return of capital and the children would own one ‘B’ share each. These ‘B’ shares would have no voting or other ‘control’ rights but would have full entitlement to any dividends or return on capital (which must be approved by the parents). The ‘B’ shares could be created with differing rights including tax efficient withdrawal of capital, enjoyment of growth in capital value or a right to future dividends.

At the same time, the children/beneficiaries enter into a shareholders’ agreement, which is a private document setting out the directors’ powers and shareholders’ rights. This agreement together with the company’s Articles of Association are key to providing that control rests with the board of directors, usually comprising the donor and spouse or other trusted individuals. As with any other company limited by shares the board will have the power to appoint additional directors and make decisions including how cash held is invested, the distribution of profits, transfers of shares, changes to voting and share of income and capital. Importantly, the donor has these powers as a director without needing to hold voting shares which would otherwise give the shareholder value in the company potentially chargeable to IHT.

Funding for the FIC is typically in the form of cash (which can be funded via an interest-free loan); the company then acquires assets (property, cars, art, trading companies etc.) that generate a return. Income is either re-invested within the company, or used to repay the loan (alternatively the loan could be gifted/assigned to other family members where the capital value is no longer needed or into a trust). The funding need not be in cash but could be a property, for example, but there would be potential Stamp Duty Land Tax and Capital Gains Tax implications.

Any underlying capital value grows in the name of the beneficiaries. The ongoing tax position is the same as for any other company limited by shares with a corporation tax liability on any income or capital gains (currently this rate is19% but may change in the March 2021 budget).

Electric Company Cars

For 2020/21, it was possible to enjoy an electric company car as a tax-free benefit. While this will no longer be the case for 2021/22, electric and low emission cars remain a tax-efficient benefit.

How are electric cars taxed?

Under the company car tax rules, a taxable benefit arises in respect of the private use of that car. The taxable amount (the cash equivalent value) is the ‘appropriate percentage’ of the list price of the car and optional accessories, after deducting any capital contribution made by the employee up to a maximum of £5,000. The amount is proportionately reduced where the car is not available throughout the tax year, and is further reduced to reflect any contributions required for private use.

The appropriate percentage

The appropriate percentage depends on the level of the car’s CO2 emissions. For zero emission cars, regardless of whether the car was first registered on or after 6 April 2020 or before that date, the appropriate percentage for electric cars is 1% for 2021/22. For 2020/21 it was set at 0%.

This means that the tax cost of an electric company car, as illustrated by the following example, remains low in 2021/22.

Example

Jaz has an electric company car with a list price of £30,000. The car was first registered on 1 April 2020.

For 2020/21, the appropriate percentage for an electric car was 0%, meaning that Jaz was able to enjoy the benefit of the private use of the car tax-free.

For 2021/22, the appropriate percentage is 1%. Consequently, the taxable amount is £300 (1% of £30,000).

If Jaz is a higher rate taxpayer, he will only pay tax of £120 on the benefit of his company car. If he is a basic rate taxpayer, he will pay £60 in tax. This is a very good deal.

His employer will also pay Class 1A National Insurance of £41.40 (£300 @ 13.8%).

For 2022/23 the appropriate percentage will increase to 2%.

Low emission cars

If an electric car is not for you, it is still possible to have a tax efficient company car by choosing a low emission model.

The way in which CO2 emissions are measured changed from 6 April 2020. For 2020/21 and 2021/22, the appropriate percentage also depends on the date on which the car was first registered as well as its CO2 emissions. For low emission cars within the 1—50g/km band, there is a further factor to take into account – the car’s electric range (or zero emission mileage). This is the distance that the car can travel on a single charge.

The following table shows the appropriate percentages applying for low emission cars for 2021/22.

As seen from the table, choosing a car with a good electric range can dramatically reduce the tax charge. Assuming a list price of £30,000, the taxable amount for a car first registered on or after 6 April 2020 with an electric range of at least 130 miles is £300 (£30,000 @ 1%); by contrast, the taxable amount for a car with the same list price first registered before 6 April 2020 with an electric range of less than 30 miles is £4,200 (£30,000 @ 14%).

The moral here is to choose a new greener model and you will be rewarded with a lower tax bill.