Family Investment Companies are as efficient as ever

Corporation tax had been due to rise from 19% to 25% for most companies from 1 April 2023. In the recent “mini budget”, the Government confirmed that the rate will be maintained at 19% for all companies, irrespective of their profits. This decision means the UK will continue to have the lowest corporation tax rate in the G20. The rationale for the decision is to boost business investment in the UK, stimulate economic growth and keep the UK internationally competitive.

This is particularly good news for clients who have set up, or were considering setting up, a family investment company (FIC) which are particularly suitable for clients investing for long-term growth in UK companies or those who wish to retain control over gifted assets where a trust is unsuitable.

Within a FIC, income and gains are subject to corporation tax. The increase to 25% was going to have a significant impact on the tax paid within FICs and it was anticipated that this may put individuals off. The maintained 19% rate is lower than the current rate of Capital Gains Tax on personally-held investments (20%) meaning that FICs continue to be tax efficient wealth-holding vehicles.

At shareholder level, shareholders are subject to tax when distributions are made to them and dividends will be taxed at the shareholder’s marginal income tax rate. It has been proposed that the recent 1.25% increase to dividend tax rates will be reversed from 6 April 2023, with basic, higher and additional rates of dividend tax set to be reduced to their 2021-2022 levels (7.5%, 32.5% and 38.1% respectively) which would reduce the tax payable when profits are extracted from the FIC to their previous level, assuming this change goes ahead.

These developments (assuming they are implemented), coupled with HMRC’s confirmation last year that FICs will be considered “business as usual” (Business as usual for Family Investment Companies, Thomas Denny (charlesrussellspeechlys.com)), should ensure that FICs will continue to be considered as attractive wealth-holding vehicles – for now at least! 

Given the current uncertainty, it cannot be ruled out that further changes may be proposed which may have an impact on FICs and dividend rates, both in the short and medium-long term.