UHY Ross Brooke Chartered Accountants

Why you should consider a Family Investment Company as part of your overall strategy

Family investment company

Many people in employment or self-employment are interested in buying residential property, mainly as part of their long term wealth planning.

In addition many consultants affected by the new off-payroll rules may be questioning whether they still need their company and what to do with the sum of money already in their company in the knowledge that if they take that money out they will have to pay personal tax on it. See also https://www.ross-brooke.co.uk/off-payroll-working-and-closing-my-company-what-are-the-options/

If an individual acquires a residential property as a buy to let, they will pay tax on the rental income minus expenses at their marginal rate which might be as high as 40%, 45% or even 60%.

 Since 5 April 2020 any mortgage interest on the borrowings only obtain tax relief at 20%. Bizarrely in some circumstances it is possible that the tax payable exceeds the profit that the taxpayer makes each year.

 In addition, on sale of the property, a higher rate taxpayer would pay capital gains tax on the profit at 28%. Those taxes are all payable whether the taxpayer spends the profits personally or is saving up the profits to acquire another property. Altogether that is a lot of lost income through tax.

Conversely companies can claim full tax relief for mortgage interest paid and only pays tax on rental profits and the profit on the eventual sale of the property at 19%.

Further tax might be payable by the individual if any is extracted from the company as dividends etc, but whilst its left in the company, perhaps to build up a fund to buy another property no further tax is due

Rather than paying high rates of tax by extracting income from the company now, it is often intended that dividends are taken from the company by the shareholders to fund their retirement at a very low rate of tax.

So over the life of the investment there can be significant tax savings.

Not only that, but a company vehicle would allow ownership to be spread amongst family members with perhaps some dividends being paid in a very tax efficient manner to adult children for perhaps their first car, or their university fees and living costs.

No-one likes to talk about death but spreading the ownership can also help with long term inheritance tax planning.

 If properties are held in an individual’s estate then on death it’s very possible that tax at 40% will be due and the properties have to be sold in order to pay the tax and the property portfolio is decimated.

If the properties were held in a company then shares could be transferred to children over a number of prior to death to reduce the value of the taxable estate and consequently any inheritance tax payable. With careful planning the property portfolio can be retained

If it is intended that the property portfolio should benefit future generations of the family then the use of trusts should also be considered. Whenever the word trust is used it can worry people because they sound complicated and there may be some connotation of tax avoidance but a simple family trust is simple to operate and there is no question of any tax evasion motives.

If you gift the company shares to a trust at least 7 years prior to death then the value falls outside your estate on death. Similarly on the subsequent death of your children or grandchildren. The property portfolio passes down through the generations without being disturbed by generational changes.

The trust is not entirely tax free, for example there is a 10 yearly tax charge but the tax payable by the trust is a fraction of that which might be paid on death outside of a trust, without careful planning.

As well as limiting inheritance tax liabilities, a major advantage of a trust is that it protects the family assets. For example it would protect assets from any offspring that might not be able to handle money well, or may fall into financial difficulty through no fault of their own or from a claim by a future and as yet unknown ex-spouse of your children or grandchildren.

Although family investment companies are often used to acquire residential properties, for the most part the rules and benefits apply to other assets for example commercial property, stocks and shares, valuable art or wine.

In summary, with or without the use of a trust, family investment companies are very tax efficient over both the short and long term.

We have acted for a family investment companies over many years so if you would like to discuss whether one would be suitable for you please do get in touch.

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