HMRC & Family Investment Companies

In 2022 there were over 50,000 property investment companies formed in the UK but less than 1% of them were Family Investment Companies. This is despite HMRC having given this form of business continuity and legacy planning the thumbs up in the previous year.

In this article and accompanying video, we explain what the difference is between a Family Investment Company and an ‘off-the-shelf’ property investment company.

What is a Family Investment Company?

A Family Investment Company is a Limited Company comprising a more complex share structure to enable the founders of the business to allocate dividends more tax efficiently and to move growth in the value of the business outside their estate for inheritance tax planning purposes. Bespoke legal advice is required to draft shareholders agreements, amend the company articles of association and also to form and register a Discretionary Trust to hold shares in the company to which growth in value will accrue.

Whilst a standard Limited Company can be formed online for less than £20 a Family Investment Company structure typically costs £15,000 to £20,000. However, the tax savings associated with a Family Investment Company are immense and should therefore be the foundation of every landlord or property investor’s business model.

There are four reasons why over 99% of property investment businesses are set up badly, these are: –

1. lack of knowledge of even the existence (never mind the benefits) of a Family Investment Company structure
2. short-term thinking or short-sightedness
3. penny wise and pound foolish
4. lack of awareness that HMRC have given these tax ‘planning’ structures the ‘thumbs-up’

70 years ago, who would have considered that properties would grow by 128 X in value?

Sadly, it is unlikely that many people reading this article today will be alive 70 years from now. However, their is a much better chance your legacy will live on through your family. Therefore, you might feel you have a moral obligation to your family to ensure that your legacy isn’t subjected to 40% inheritance tax each time it passes to the next generation.

How is growth accounted for?

In many cases, it isn’t because it sits ‘off-balance-sheet’.

The accounting rules governing this are FRS102 and FRS105.

Smaller entities – defined by meeting at least two out of three of the following thresholds…

1. Turnover not more than £632,000 (adjusted for periods longer or shorter than 12 months)
2. Balance sheet total not more than £316,000
3. The average number of employees not more than 10

.… can report under FRS105, which does not require the annual revaluation of properties to Fair Market Value at the end of each reporting period.

Even if FRS102 was to apply, the tax ‘trigger point’ must be considered.

Think of it like this, if the growth is owned personally there is no tax due until the properties are transferred. That is the ‘trigger point’ for the tax falling due.

In a SmartCo, the trigger point for the tax becoming payable on growth shares is the point the company is sold, liquidated, or wound up. This is documented in the company shareholders agreement. If the company is not sold, liquidated or wound up the tax ‘trigger’ has not been pulled, so no tax is due.

The company growth shares sit in the Discretionary Trust, so if the company has not been sold, liquidated, or wound up the value of the shares remains at 10 pence for the purpose of calculating the 6% anniversary tax payable every 10 years on the value of the assets held in the trust.

SmartCo more conveniently positions the tax ‘trigger points’.