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Malcolm Gunn FTII, TEP elaborates on the tax advantages available with private investment companies.

Introduction

The compliance obligations for all companies are being tightened over the next year or two. For a start, the filing deadline for accounts is being shortened from ten months after the accounting date to nine months and there will be much higher penalties for late submission. On top of this, HMRC will require Corporation Tax Returns to be filed electronically, and together with Companies House they intend to require accounts and computations to be filed using software which is not commonly available at present. This software will be accessible on HMRC’s website, but quite clearly there will be many people who handle their own accounts who will find the software difficult and unintelligible. At present, HMRC seem unconcerned about this.

Even so, families who have private investment companies should not be daunted. Small companies used to hold property portfolios, for example, can give considerable tax benefits so long as the company is used as a long term investment vehicle to be passed from generation to generation.

Family Holdings

The crucial point is that if the shareholdings can be fragmented over different members of the family, each holding less than 25 per cent, under established share valuation principles, the value of each shareholding is likely to be discounted by 75 per cent on asset value. In this way, three-quarters of the value in the company magically disappears out of the tax system on the death of each shareholder.

This principle does not apply for holdings held by husband and wife, but in this case, there are mechanisms by which the joint shareholding can be reduced with minimal value being passed out of their joint estates for Inheritance Tax purposes.

Gifts of Shares

Another principle which assists the tax planner in relation to private investment companies is that, although gifts of shares to the next generation are treated as disposals at market value for Capital Gains Tax purposes, the disposal value is established without reference to the size of the shareholding out of which the gift is made. This can be very useful in minimising the Capital Gains tax consequences of the gift.

Will Trusts

Even better opportunities can be made available on the death of a shareholder. If the spouse survives, separate will trusts can be established to hold minority shareholdings and if these are terminated with careful timing, more value can be eliminated, sometimes quite free of tax.

Avoiding Tax on Incorporation

These tax planning opportunities might look very tempting for those who have property portfolios not held within a company, but the problem then is that putting the properties into a company can involve multiple tax charges – Capital Gains Tax on the disposal to the company and Stamp Duty Land Tax as well. There is, however, a Capital Gains Tax relief for the incorporation of businesses, and in any particular case it will be worth researching whether this can be used to avoid liability. By the same token, Stamp Duty Land Tax might be avoidable if the business has been operated as a partnership before incorporation.

Conclusion

All the tax rules in this area are complicated and fraught with pitfalls, and so I have only given a brief outline of what is available – just to encourage you not to give up on your private investment company!