FIC corporation tax
AN FIC will be liable to pay corporation tax (CT) on its profits, the (CT) rate is mathematically lower than personal income for higher rate taxpayers on the basis the individual paying the higher rate of personal tax refrains from extracting the profits by way of taking a full dividend.
Dividends
AN FIC has the option to pay dividends to its shareholders (the children) a dividend allowance of £1,000 currently applies21 how much tax you pay on dividends above the dividend allowance depends on your Income Tax band22.
#TableB
Tax Band
Tax rate on dividends over the allowance
Basic Rate
8.75%
Higher Rate
33.75%
Additional Rate
39.35%
#TableE
It should be noted in 202323 the main rate of corporation tax increased to 25% for close investment companies24
Example Basic Rate Tax Payable: £20,000 Profit via Family Investment Company:
#TableB
Basic Rate Taxpayer
Higher Rate 40%
Additional Rate 45%
Goss Income
£20,000
£20,000
£20,000
Corporation Tax 25%
£5,000.00
£5,000.00
£5,000.00
Nett Profit
£15,000.00
£15,000.00
£15,000.00
Dividend Tax
£1,312.50
£5,062.50
£5,902.50
Total Tax Paid
£6,312.50
£10,062.50
£10,902.50
Effective Rate
31.56%
50.31%
54.51%
#TableE
If a property is owned by the parents outside of a limited company and they have executed for example a deed of trust allowing the income to be paid to the children excluded personal and dividend allowances for simplicity the child would pay 20% tax verves 31.5% via an FIC structure. It should be noted that based on the increased tax burden created by the FIC structure no dividends ought to declared and paid over the dividend allowance, profits should be retained on the balance sheet for further investment.