Understanding Close Investment Holding Companies and Their Tax Implications

It's important to understand the tax implications of a Close Investment Holding Company (CIHC) - here we explain what defines a CIHC.

When navigating the complex world of corporate taxes in the UK, you’ve probably stumbled upon the term Close Investment Holding Company (CIHC). It is an easy concept to overlook that has a tax implication and could result in you filing an incorrect tax return, so it is worth taking the time to understand what they are.

A CIHC is a company that is more focused on holding investments than getting stuck in with doing anything actively like trading or commercial activities.

Here are the key criteria for a CIHC:

• Control – the company is controlled by five or fewer participators (participators are usually the shareholders).
• Purpose – the company does not exist primarily to trade commercially.
• Investment Focus – the main activity of the company is holding investments like stocks, bonds, or property.

Here’s the hitch—being labelled a CIHC comes with tax implications. Unlike your typical trading companies, CIHCs don’t get to enjoy the lower small profits rate of corporation tax, they’re subject to the main rate, no matter how small their profits. As of April 2023, that rate stands at 25%. Previously when we had a flat rate of 19% on profits, being a CIHC was not an issue as there was just the one rate, but with the increase in tax, we also got a small profit rate and thus the return of CIHCs.

Examples:

To make things clearer, let’s look at a couple of real-world examples that involve a CIHC:

1. Family Investment Company (FIC):

A family sets up a company to manage their wealth, these structures are increasingly popular as a method of passing on wealth through generations and protecting assets. The company invests in a mixture of stocks, bonds, and real estate, with the aim of growing and safeguarding their wealth over time. They’re not interested in trading day-to-day; they’re in it for the long haul and this is likely to be a CIHC.

2. Venture Capital Fund (VC fund):

This is where a group of investors form a company to pool their funds to invest in promising startups. Their goal is to spot the next big thing and provide the necessary capital for growth and capitalise on that investment when it becomes successful. They hold these investments, hoping for long-term gains and thus likely to be a CIHC.

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