The October Budget turned Inheritance Tax (IHT) on its head. Any client that had an IHT liability probably had it increased significantly with the inclusion of a client’s pension fund from April 2027. David Batchelor, Founding Partner of Wills & Trusts Partnership Ltd, explores an often-overlooked estate planning solution that can be highly effective when done right.
With the increase in IHT for so many people, what are the options to reduce what most people of any wealth think is a grossly unfair tax?
Many advisers are now running into the issue where gifts into trusts are limited in the scope of estate and IHT planningTestate and IHT planning as they reach the nil rate band limits and risk triggering a chargeable lifetime transfer charge. So where do they go from there? The answer for many will be The Family Investment Company (FIC).
The FIC is possibly the most underused IHT mitigation tool, simply because insurance companies and mainstream providers do not provide them. However true estate planning means sometimes moving away from the ‘fill in the blanks’ arrangements of those companies and looking at a more bespoke solution for clients. Hence the rise of the FIC.
What is a FIC?
Put simply a FIC is a limited company that holds family assets where the shares are gifted to family members to reduce the giftors estate value.
FICs are incredibly flexible because they are created for each client separately and can provide the panacea of having your cake and eating it. The FIC allows you to gift away assets yet retain control over those assets and even retain access to capital or income.
The downside? They are for complex cases as even the most basic FIC will start at £5,000 in fees.
How does a FIC work?
Most FICs are set up by the senior generation within a family, who remain as company directors of the company. Placed into the company could be assets such as investments, cash or property, to remove it from the estate. This can be done in one of three ways:
- Gifting: Assets are simply gifted to the company
- Share Purchase: Assets are used to purchase shares in the company, effectively swapping assets for shares
- Directors Loan: A director lends funds to the FIC, with the option to withdraw the loan later without triggering tax.
When a gift is used, the standard 7-year period applies before the amount falls outside of the estate for IHT purposes. The giftor will usually retain ‘income’ by taking a salary from the company. The salary is generated by the dividends of shares, rental income from property, or interest from cash.
When the share purchase route is chosen, you swap assets for shares. Typically, all or some of the shares are then gifted to the next generation within the family group, usually children or grandchildren. In many cases, this gift of shares is placed in a Discretionary Trust so that the senior generation can retain control as trustees. There’s nothing worse than your gift being lost when your children divorce (potentially)!
The last option involves creating a director’s loan to the FIC. Repayment of the loan generates tax-free income to the giftor for as long as the loan lasts. This is usually done where the giftor is relatively young and likely to be around for at least another 10 years or so.
Advantages of a FIC
W&T Accountants, a firm that creates and runs FICs for advisers says “With a FIC there is no limit to what can be placed in the company. Rather than being limited to the £325,000 NRB which is the case with Discretionary Trusts, you can literally place millions into the FIC. This is what makes them so powerful”.
Since the Autumn Budget last October, W&T Accountants has seen enquiries in FIC jump tenfold as advisers seek to find alternative ways to mitigate IHT.
By setting out different classes of shares you can create a gifting mechanism that meets a family’s requirements. For example, you can create shares for grandchildren where the dividends meet the cost of school fees. This allows you to use the grandchildren’s tax allowances to reduce income tax.
Using a FIC
When it comes to practicalities, an FIC is for more sophisticated clients with more complex tax issues. The bigger the IHT liability, the more likely an FIC can solve the problem.
Unlike many solutions, the FIC is a non-regulated product as it is not investment based and that makes solutions easier to implement. “While a suitability letter is not a requirement for FIC, they should be used as good practice” says Molly Hird, a Chartered Accountant specialising in FICs.
While FICs cannot be used to hold pensions, the fact that they can be used to hold other assets means that for those clients who want to, you can use this solution with them to free up the NRB to cover the IHT that will now be due on pensions as of April 2027 and going forward. It is this that makes the FIC so appealing.
We are driven by the problems that our clients have and now clients’ IHT problems are bigger than ever and so the rise of the FIC is inevitable.
Don’t wait, act now
For those advisers with high-net-worth clients that have complex estate and tax arrangements, the FIC can soften the blow of their pension now forming part of their taxable estate.
If clients were using the pension as an IHT mitigation tool, it’s important to start talking to them about alternative IHT strategies, as this will no longer be available. The last thing advisers want is to have to start conversations in 2027 with the April deadline looming, so being proactive is key here.
About David Batchelor
David is the Founding Partner of Wills & Trusts Partnership Ltd, which began as an adviser firm in 1992, but now brings together an independent financial adviser and an accounting firm.
Previously President of the Life Insurance Association, David co-founded the Personal Finance Society, of which he was a director for several years. The Society is now a pillar of the financial services profession.
David is a highly regarded public speaker who is regularly invited to host or speak at conferences worldwide.
