FIC structure, alphabet shares and Corporation Tax advantage vs income tax
A FIC is a UK private limited company with bespoke Articles of Association providing for multiple share classes (A ordinary; B ordinary; C ordinary — 'alphabet shares') with different dividend and voting rights. The founding parents typically hold A shares (with voting control and capital preference); adult children and family members hold B and C shares (lower voting rights; right to receive B/C dividends selectively). CORPORATION TAX ADVANTAGE: rental income and capital gains in the FIC are taxed at Corporation Tax — 19% (profits under £50,000); 25% (profits above £250,000). An individual higher-rate landlord pays income tax at 40-45% plus is subject to Section 24 mortgage interest restriction. Example saving: £100,000 rental profit at CT 25% = £25,000 vs IT 40% = £40,000 — saving £15,000/year. Interest is fully deductible within a company (no Section 24 restriction applies).
Income splitting, settlements legislation, IHT, SDLT/CGT on injection and when FIC is unsuitable
- Income splitting: selective dividends to adult children (basic-rate taxpayers) — dividend taxed at 8.75% vs parent's 33.75% or 39.35%
- Settlements legislation (ITTOIA 2005 s.629): minor children's dividend income taxed as parent's income; adult children NOT subject to this rule
- IHT — PET gifting: FIC shares gifted to adult children are PETs (outside estate if donor survives 7 years); residential property in FIC does NOT attract BPR
- SDLT and CGT on injection: transferring existing portfolio into a FIC triggers SDLT on market value + CGT on accrued gains — costly; FIC is most effective for new acquisitions from the outset
- HMRC FIC Unit (2019): scrutinises undervalued share subscriptions; settlements legislation; GAAR; benefits in kind
- Unsuitable: portfolio under ~£500k-£750k (compliance costs outweigh savings); all family members are higher-rate taxpayers; short investment horizon; basic-rate landlord