We examine the creation and key treatment of Family Investment Companies (FICs), and the factors to consider.
Inheritance tax (IHT) and succession planning are always important for high-net-worth clients. The number of estates paying IHT has quadrupled over the past few years. The Budget announced an extension to the IHT bands’ freeze to 2030 and made changes to business property relief. So people are looking at ways to structure their wealth to make it more tax-efficient for the long term.
A common problem is that an individual may want to pass wealth down to the next generation, but not be happy to give up control.
Historically, trusts were seen as a route to pass on wealth and still retain that control. But the high tax rate currently charged on trusts means Family Investment Companies (FICs) are more often the go-to vehicle instead. And they can achieve similar results to a trust in separating ownership and control.
What are the benefits of an FIC?
An FIC is a company created to hold investments for a single family. What makes it different from other companies is that its documentation is specifically tailored to meet that family’s needs. These are based on control, rights, and the particular requirements of the family.
The articles of FIC must ensure that control is in the hands of the right people, often whoever is funding the company. This control will be achieved through the voting rights of the shares and the directors’ powers.
An FIC usually has a range of share classes, to give directors the ability to pay different amounts to different shareholders at different times. Usually, only some of the shares will have voting rights, which are retained by the person funding the FIC.
Most families will also want the FIC to act as a protection vehicle to prevent the family wealth from being lost by divorce, bankruptcy, or other unforeseen circumstances. It is quite common to restrict shareholders to being descendants of the founder, or having mandatory transfers in particular situations, such as bankruptcy.
Key considerations
So to help the FIC retain control of the flow of funds to the shareholder, the directors must determine how the funds are invested and how they can be used for family wealth protection.
As the FIC is a company, it will be subject to corporation tax. But the good news is that dividends received by the FIC are likely to be exempt from corporation tax. This makes an FIC particularly suitable for investing in equities. It will have a lower tax rate than if the income is received by an individual or a trust.
But beware if investing in bonds or other investments that might be taxed under the loan relationship rules. These would be subject to tax on an accrual basis (and would therefore be taxed on the increase in value over the period).
So what should someone consider when thinking about whether to create an FIC?
- An FIC is a long-term structure. It is not straightforward to extract capital from an FIC. This means it’s important to ask whether the founder can afford to make the gift, both in the long and short term
- What is the right sort of company: unlimited or limited? An unlimited company is exempt from filing accounts at Companies House. But it may not be suitable, depending on the risk of investments
- An FIC is not cheap. To meet the needs of the family, it’s likely bespoke articles will be required and it’s vital these documents are drawn up correctly. They must reflect how the company will operate, to avoid cost at a later date. There will also be ongoing running costs
- Is a UK or an overseas company more suitable? This will depend on the situation of the founder and other shareholders.
An FIC is likely to be the right choice for holding larger capital sums, making long-term investments and producing income for shareholders. Depending on the situation, it may be possible to combine the use of an FIC with a discretionary trust.
If you would like to discuss further any of the issues raised in this article, please contact Stephen Kenny.
