Mr & Mrs B were in their 50s and wanted to invest in properties for their children to inherit. They planned to invest £1.5m in property, however these properties would fall into their estate and would be subject to inheritance tax (IHT) on death at a rate of 40%. This meant that their children may have been forced to sell inherited properties in order to fund the significant IHT bill.
We suggested setting up an FIC so that Mr & Mrs B could lend the £1.5m to the company to acquire the properties.
We structured the FIC so that Mr & Mrs B held a class of share which entitled them to capital in the company at the market value when the FIC was established. The children had a class of share which entitled them to capital in the company in excess of the market value (i.e. the growth in the company).
The parents’ shares also had rights to dividends as well as the right to vote.
Mr & Mrs B were able to protect their estates from any increase in value on their investments whilst maintaining control over the assets and taking dividends to fund their lifestyle.
The income received from the FIC was also subject to corporation tax rates, which are generally lower than income tax rates. Rental profits from the properties were also subject to 19% rather than 45% tax. Plus, dividend income from investments held by the FIC were exempt from corporation tax altogether.
In addition, the mortgage interest was deducted in full when calculating rental profits (this isn’t the case where the properties are held personally).