When should you consider a Family Investment Company?
Trusts have traditionally been utilised by wealthy families and individuals as part of their tax and succession planning for years. However since the changes to the taxation of trusts in 2006, which introduced an initial 20% Inheritance Tax charge for assets transferred into trust above the Nil Rate Band Threshold (currently £325,000), they have been less attractive.
This has been amplified in recent years as the Nil Rate Band Threshold has remained frozen at the current amount since 2009. As a result Family Investment Companies have become increasingly popular amongst those with significant wealth due to the favourable tax treatment and flexibility.
What is a family investment company?
A Family Investment Company (“FIC”) is an alternative to family trusts and can be used as a vehicle to preserve family wealth and mitigate taxes. An FIC is a UK private company (limited or unlimited) that is controlled and run by its directors (usually the parents of the family), with family members (usually children or dependents) owning the shares that hold capital value of the assets.
An FIC enables parents to retain significant control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.
How are they established & operated?
There are many different ways to set up and operate an FIC, but common features include:
- FICs are generally newly incorporated companies set up for this particular purpose.
- If the FIC is set up as a limited company, it is necessary to file annual accounts with Companies House. Alternatively, to maintain privacy, the FIC can be set up as an unlimited company where no requirement to submit annual accounts is required.
- Once the company is set up the parents can transfer cash or assets to the company by way of a loan, which is then invested by the FIC.
- The parents subscribe for voting shares (preferential shareholder) in the FIC and are named as directors, having exclusive voting control within the company at shareholder and board level. This means that parents will have all the voting rights and be able to control the FIC, but no rights to the capital.
- The directors will determine when dividends are paid and will make general management decisions of the company.
- Where cash is transferred there are no tax consequences on the initial loan of funds.
- The ability to hold shares being limited to specified categories of family members or family trusts.
- The Articles and Shareholders Agreement are drafted to protect the shares from sale outside of the family, making this type of structure more effective in a divorce or dispute.
How are they taxed?
FICs may offer tax efficiency, but specialist advice should always be sought. Some of the taxes to be aware of when dealing with FICs are:
- Corporation Tax
- Capital gains Tax
- Tax payable on Dividends
- Income Tax
Who are they suitable for?
A FIC is generally most suitable for those with substantial funds to invest (at least £1m plus) and who are able to keep the funds within the company for a lengthy period thereby giving the company and underlying investments time to grow.
Due to their relative complexity FICs are often attractive to business owners and those with experience of running a company. Whilst there are costs associated with creating and running a FIC, these costs are likely to be a fraction of the Inheritance Tax liability which would have arisen had the same funds been invested through a traditional trust structure.
Summary of benefits
- Wealth preservation for future generations
- Cash transfers into the company are tax-free
- Retaining control over investment decisions
- Asset protection
- Taxation efficiency and deferral
Get in touch
If you have any questions about Family Investment Companies, or would like more detailed advice or assistance, our specialists are on hand to help. For more information, please contact Daniel Wilson or Georgina Sinha.
Our Estate Planning, Tax & Trust team provide practical and comprehensive advice on Wills, inheritance tax, trusts, lasting powers of attorney and estate administration.