Family Investment Company - GIA or Bond?
Wildparaplanner
Member
Hi all,
I was wondering what people's experiences are with advice around investments within a family investment company? I've read an article on company investments on Quilter, which tries to explain the differences between the accountancy practices applied to each of GIAs and bonds, however I am still none the wiser as to what the better option to use is?
With regards a particular case, the investment mandate is purely on growth, which leads me to believe that a GIA may be better as gains are only reported on disposal.
I suspect FICs are mostly following the fair value accountancy practice meaning the bond structure would need to be reported on every accountancy year. However, the investment strategy is likely to be a model portfolio service, which I think would add additional strain to the accountants if held in a GIA which in turn may give rise to additional cost for their services. This then leads me to think a bond structure could be better, but if someone can explain a little better, that would be great.
Many thanks
Wild
Comments
If the business is a micro entity then it can use FRS105. This is considered to be "better" for bonds, as it avoids being taxed on the increases in annual values when no asset sales are taking place. M&G has a decent article on the tax differences that may be easier that Quilter's one, although it isn't a simple subject.
Also, I'm not sure a FIC can qualify for FRS105 as it may fall under the 'investment undertakings' definition and would be specifically excluded. Therefore the historic cost option wouldn't be available. But I'm not 100% on that point.
I personally feel that if you are looking at a FIC then you should be using a fully advised structure involving finance, accounting, and legal, and that is part of the cost. Assets that are directly owned and that create direct revenue back into the FIC are preferably to a life insurance bond in my opinion, as all the tax is clean and settled as you go.
Our view is this is a purley investment decision not a tax decision. If you can get what you want from a GIA then that works - a lot of work for an accountant mind you.
Bonds aren't the best as you turn tax exempt dividends into dividends subject to corporation tax. Most investment companies are not eligible for small profits rate so onshore you'd be causing 5% tax on dividends (tax credit offset) - offshore causing 25%
We have a fairly decent guide too which has a Are bonds or OEICs best on page 17
https://www.mandg.com/dam/pru/shared/documents/en/genm600602.pdf
Thanks both,
Forgive my ignorance, but why would the dividends be subject to corporation tax? I thought dividends within a life bond are exempt from tax and only interest and capital gains are taxed at corporation tax rate?
I would say that you reduce the work involved for accountants if you use a portfolio that a) distributes income i.e. is NOT accumulation units and b) don't use mixed asset funds.
This keeps dividends separate from interest and income separate from growth. It therefore avoids any issues with lagging income data on offshore reporting funds. For fixed interest funds that need to use loan relationship rules it also means that the growth in the fund is ONLY growth, as all interest has been paid and can be reported as income without faffing about with notional distributions.
Basically you turn the exempt dividend into bond gain and bond gains aren't exempt for the company. If the company held the dividend producing asset directly the dividend would be exempt..> @benjaminfabi said:
Yes not having Acc units makes sense to me too.
I should have said a lot of work for the accountant if it's a multi OEIC approach.
A mixed asset OEIC held by a company I understand the OEIC provider has to supply a tax voucher that is streamed into interest and dividend so not much hassle for the accountant and only one asset to revalue every year.
If you go multi OEIC that's multiple income streams and multiple OIEC values to keep tabs on.
yes @les_cameron you could/should do a techy Thursday entirely on the subject of...
Why multi-asset funds are bad for businesses, and why acc units are nearly always worse than inc for any taxable account!
I am constantly fighting against the tide of opinion when it comes to inc units in a GIA, especially in retirement.
Oh but they aren't they are best ;-) I should do a session on why Acc units still create taxable income ... found my first misguided person already this year.