Family Investment Companies
What are Family Investment Companies?
Family Investment Companies (FICs) are private limited or unlimited companies of which the directors and shareholders are all members of the same family. FICs are a vehicle for growing and holding family wealth which can be a flexible tax planning alternative to the more traditional structure of the family trust.
Who are they for?
A FIC may be suitable for you if you have significant family wealth which you wish to pass on to the next generation retaining control over how the capital and income is spent. It is particularly suitable if you wish to reduce your Inheritance Tax (IHT) liability and gifts to lifetime trusts are not attractive because of a likely immediate lifetime charge to IHT at 20%. This charge will arise if the gift exceeds the IHT nil rate band.
How do FICs work?
You, as founder, will be the first director and shareholder of the FIC. Typically different classes of shares with different rights to vote and to income and capital are created, to provide for flexibility within family structures and different timing of payments of dividends from the company to different beneficiaries. You will subscribe for the shares in cash, and you may also loan funds to the FIC. Once subscribed the shares can be transferred to
other family members or friends, which will be an IHT free gift if you survive seven years from the gift. Unlike a trust there is no limit to the value that can be transferred as the gifts are potentially exempt transfers and thus no IHT is payable on them unless you die within seven years.
The shares which you retain will have voting rights but will not have any rights to capital or income so that there is no reservation of benefit for IHT purposes. The shares given away will usually be of a different class to your retained shares (as they will have the right to income and capital but no voting rights), and indeed each beneficiary can receive a different share class from each other if they are to have different rights to capital and income. As director, you can control the amount of income received, as the directors will control the flow of dividends.
What are the tax savings?
FICs can save IHT and they can save income tax if profits are retained. The IHT saving is achieved by the lifetime gift to your children (or other beneficiaries) which is IHT free if you survive by seven years.
The profits of the FIC are liable to Corporation Tax at 19% (2022/23) and there is no further tax liability on retained profits which make FICs ideal vehicles for retaining and growing family wealth for the future. If profits are distributed to tax payers then there will be an element of double taxation but as the Directors control the flow of dividends it might be possible to plan to minimise this. In addition, if dividends are payable to the founder’s minor child then those dividends will be taxed at the founder’s marginal income tax rates. Where shares are to be given to minor children they will need to be held in a bare trust until they are 18.
Corporation tax is payable on gains at 19% (2022/23) and an indexation allowance is available to counter the effects of inflation, which is not available to individuals, but there is no annual capital gains tax allowance.
What are the drawbacks
The shares in the FIC will be beneficially owned by the shareholder and will be exposed in their estate on divorce, separation, death and bankruptcy so the FIC does not have the asset protection benefits of a trust. However, by being able to control dividends from the trust and restrict transfers you would still retain a large amount of control and flexibility.
Case Study
Adam Black has personal wealth in excess of £5 million and a pension which caters comfortably for his income needs now that he has retired. He would like to make substantial gifts to his two adult children to reduce his potential IHT liability but they have not proved themselves to be very reliable in their handling of money. Adam investigates making a gift to a discretionary trust but finds that this would limit him to a gift of the IHT nil rate band every seven years if he wishes to avoid an immediate lifetime IHT charge at 20% (2022/23).
Adam therefore sets up a FIC with the sum of £1million subscribing at par value for each class of share. He retains ‘A’ shares in the company which give him voting rights but no rights to capital or income. He transfers ‘B’ and ‘C’ shares to his children. These shares have rights to capital and income but no voting rights. Adam can control the dividends declared on the shares and retains the majority of the profits within the company. The company’s Articles of Association state that no shares can be transferred outside of the family so Adam is reassured that his children cannot realise their investments and spend the proceeds unwisely.
In the meantime Adam has made a potentially exempt transfer to his children of £1 million which if he survives by seven years means that his IHT liability will be reduced by £400,000.
What will we provide you with?
- All documents necessary to form the company including the Articles of Association.
- Share certificates
- Stock Transfer Forms transferring the shares in the company.
- A pro forma resolution for use by the Directors in declaring dividends.
- Advice as to how best to constitute the company, the share classes and any gifts
- We would suggest that you also review your Will as part of this process as setting up a FIC is a major change of circumstance
- It should be noted that there will be an ongoing need to prepare accounts and Annual Returns and to comply with other regulatory requirements. We suggest that you appoint company accountants to deal with this.
More details
Our Client Information Sheet “Family investment companies and estate planning” provides more information including a table comparing FICs and Discretionary Trusts.
The cost
£14000-£19000 plus VAT.