Family Investment Companies (FIC) are becoming more popular for high net worth individuals in tax and succession planning.
Whilst trusts are still popular and provide many benefits for the wealth protection of future generations, FICs are a popular alternative, that can offer additional benefits, especially as UK corporation tax is currently set at one of the lowest rates in the G20 region.
What are family investment companies?
A family investment company (FIC) is one that invests rather than trades. These investments are typically likely to be equity portfolios or property.
A Family Investment company is set up by a founder, transferring cash or assets, typically by way of a loan.
Profits that may arise from a Family Investment Company are taxed at corporation tax rates rather than be taxed on income or capital gains. This can create a significant tax saving, compared to what an individual would be paying tax at, especially if they are paying at the additional rate.
Family Investment Companies also provide Inheritance Tax benefits, making it an appealing alternative to the more traditional Trust arrangement.
Setting up a Family Investment Company
A Family Investment Company is typically set up by a ‘founder’ creating at least two classes of shares:
- The founder’s shares carry voting rights but no rights to capital growth
- The other class of shares are given to family members, who have a right to capital and income but limited or no control over the company
The founder is typically also a director of the Family Investment Company. The other shareholders cannot make decisions about investment strategy or the issue of dividends, but they are able to benefit financially. The growth in value of company assets can be removed from the founder’s estate for inheritance tax purposes.
The structure is flexible and can be tailored to meet individual circumstances. It is important to draft bespoke articles of association and shareholders’ agreements to regulate which family members can make decisions and what happens when the shareholders die or when other events occur.
The governing documents are specific to the company you are setting up and include provisions covering the distribution of profits, return of capital, directors’ appointments and share transfer provisions.
Benefits of a Family Investment Companies
- Profit from your investments will be subject to the lower corporation tax (currently 19%) rather than the higher rate income tax
- No upfront inheritance tax charges
- Tax-efficient accumulation of profits
- Full control over investment decisions
- Preservation of wealth for future generations
- Greater control over how assets are distributed and what happens in the event of severance from the family (such as divorce)
- Flexibility in the types of assets that can be held
Further aspects to consider
When considering whether a family Investment company is the right option, you should take into account the following:
- Inheritance Tax
- Divorce and death of founders
- Divorce of junior family members
- Adding new family members
- Drawing income from the asset personally
- The transfer of certain assets
Further information on these issues is discussed in our guide to Family Investment Companies, which can be downloaded here.
In early 2019, HMRC set up a unit to investigate the use of FICs, with a focus on Inheritance Tax. If an FIC is structured to be as ‘future-proofed’ as it can from the outset and is managed as a genuine investment vehicle to benefit the family members, it would be unlikely that HMRC will be able to take offence to such company structures.
In August 2021 the dedicated investigation unit was folded into another unit, after completing its review. HMRC concluded that the use of Family Investment Companies appear to be a planning strategy, often with the primary objective of generational wealth transfer and the mitigation of Inheritance Tax – it found no evidence to suggest that there is a correlation between those who establish Family Investment Trust Structures and non-compliance behaviour.
HMRC has not yet confirmed whether they will look to introduce specific legislation with regards to FICs and as such this cannot be ruled out in the future. therefore clearer direction on how HMRC views these arrangements and best practice guidelines for their use may still come forward. This highlights the importance of specialist advice regarding the setup and management of an FIC.
How Alexander & Co can help
Growing and running a family business presents unique challenges and requires a considered business approach and a different way of thinking. Many family businesses do not survive the transition to later generations which is why you need specialist advice and assistance. Here at Alexander & Co, we have considerable experience working with high-net-worth individuals and families, both within the UK and overseas.
Our family business accountants are here to give you specialist knowledge, to help you utilise opportunities and to protect against future changes for you and your family.
Get in touch
For more information, get in touch with our tax advice team on 0161 832 4841 or simply fill out the form on this page and we’ll be in touch promptly.
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