Understanding Family Investment Companies (FICs): A Tax-Efficient Way to Preserve Wealth
Family Investment Companies (FICs) have gained significant popularity in the UK as a vehicle for wealth preservation, estate planning, and tax efficiency. This article explores what FICs are, their benefits, and considerations for families looking to establish one.
What is a Family Investment Company?
A Family Investment Company is a private limited company designed for the purpose of managing and investing family wealth. Typically, the family members are the shareholders, while a subset of family members or trusted professionals serve as the directors who make decisions about the company’s investments.
FICs are structured to hold a range of investments, such as stocks, bonds, real estate, and other financial assets. The primary motivation behind setting up an FIC is to create a tax-efficient structure for wealth management, which may also allow families to retain control over their assets while effectively planning for future generations.
Why Consider a Family Investment Company?
Family Investment Companies offer several benefits:
1. Tax Efficiency
A major advantage of FICs is the potential for significant tax savings. For example, FICs are subject to corporation tax on their profits, which is currently lower than the highest personal income tax rates in the UK. Any capital gains realised within the company are also taxed at the corporation tax rate rather than the higher personal capital gains tax rates. This makes them attractive for families looking to reduce the tax burden associated with managing substantial investment portfolios .
2. Inheritance Tax Planning
FICs can play a crucial role in inheritance tax (IHT) planning. By gifting shares in the company to family members, parents can gradually transfer wealth to the next generation while potentially reducing their IHT liabilities. Shares gifted are considered potentially exempt transfers, meaning they fall out of the estate for IHT purposes if the donor survives seven years after the transfer .
3. Asset Control and Protection
An FIC structure allows the older generation to retain control over the company and its investment strategy while transferring ownership to the younger generation. By structuring the shareholding with different classes of shares, families can achieve varying levels of control and rights for different family members, such as voting rights, dividends, and capital rights. This flexible arrangement ensures that control can be maintained without necessarily giving away complete ownership .
How to Structure a Family Investment Company
Establishing an FIC requires careful planning, especially concerning the ownership and control of shares. Here’s how FICs are typically structured:
1. Incorporation and Initial Funding
The first step is to incorporate a private limited company and fund it through cash or assets transferred from family members. These initial funds may be given as a loan to the company, which can be repaid over time, or structured as shares.
2. Share Classes
A common approach is to create different share classes, each with unique rights attached. For example:
- Voting Shares: Typically held by the parents or older generation, enabling them to retain control over the company.
- Non-Voting Shares: May be gifted to children or grandchildren. These shares still entitle the holders to dividends but do not carry decision-making power.
- Dividend Shares: Could be set up to distribute income in a tax-efficient manner.
This structure enables tailored planning to meet the family’s objectives regarding control, income distribution, and inheritance .
3. Loan Agreements
In some cases, parents may prefer to lend money to the FIC rather than gift it. This strategy ensures that the funds remain accessible to them, either through loan repayment or retained interest payments.
Key Considerations and Risks
While FICs offer many advantages, some risks and considerations must be taken into account:
1. Complexity and Administrative Burden
Managing a Family Investment Company can be complex, requiring the maintenance of company accounts, filing annual returns, and adhering to corporate governance requirements. Directors must ensure that the company complies with relevant legislation and that records are kept up to date.
2. Potential Tax Changes
Although FICs can provide tax advantages under the current tax regime, tax laws and regulations can change, potentially impacting the benefits associated with FICs. It is advisable to review the structure regularly with a professional advisor to ensure it remains tax-efficient .
3. Professional Advice is Essential
Establishing an FIC requires careful planning and advice from tax specialists, accountants, and legal professionals. It is crucial to design the share structure and governance in a way that aligns with the family’s objectives while ensuring compliance with tax laws.
The Growing Popularity of FICs
The popularity of FICs has grown in recent years, particularly among wealthy families seeking an alternative to trusts for wealth preservation. With the increasing scrutiny and changes to trust tax regimes, FICs offer a viable and potentially more flexible solution.
For families considering this approach, the goal is not only to achieve tax efficiency but also to ensure that wealth is managed effectively for the benefit of future generations. The ability to retain control, plan for inheritance tax, and potentially save on tax costs makes FICs an attractive proposition for high-net-worth families in the UK.
Conclusion
Family Investment Companies present a compelling option for families looking to manage wealth and investments tax-efficiently while preserving control over their assets. They offer significant benefits, such as tax savings, inheritance tax planning, and flexible ownership structures. However, their complexity means they are best suited for high-net-worth families who can bear the associated administrative burden.
Before setting up an FIC, families should seek expert advice to ensure the structure is tailored to their unique needs and circumstances, taking into account potential risks and changes in tax legislation. With proper planning, an FIC can be a valuable tool for long-term wealth management and preservation.
If you need personalized advice about setting up Family Investment Company (FIC) , don’t hesitate to reach out to us at ISA Consortium. We’re here to help you navigate your financial journey and keep your business on track.
Book your free appointment with ISA Consortium
For more information and professional advice, please get in touch for a free appointment. We will discuss all the needs of you and your business, and head you in the right direction for future business .
All this and more
We offer all the above as part of our full Tax Services and Accounting and can also help you with Capital Gains Tax, Inheritance Tax, Retirement Planning, even filling out your Self-Assessment Tax Returns for you.