Securing your wealth using a Family Investment Company (FIC)

Securing your wealth using a Family Investment Company (FIC)

As a business owner, wealth planning for future generations is a key concern. Making sure you secure and protect family wealth in the most tax-efficient way is critical.

Family Investment Companies enable parents/grandparents to retain control over assets whilst accumulating wealth in a tax efficient manner and are used for wealth planning and succession planning.

In this blog, I'll cover the key things you need to know about Family Investment Companies (FICs).

What is a Family Investment Company?

A Family Investment Company (FIC) is a private company that is controlled and run by its directors (usually the parents), with the parents and other family members owning the shares.

How do Family Investment Companies work?

A FIC can be used by the parents who want to transfer value to family members (or other individuals) but retain some control over the assets.

The FIC can be incorporated with different classes of shares. Each class should have the same rights (voting rights etc), but the different classes allow greater flexibility in how and to whom dividends are paid. This flexibility means that an FIC is a very bespoke way to deal with your family’s structure or complexities. They can be made up of different structures, ownership, and assets.

How is an FIC created?

Creating a family investment company is usually done with a founder share held by the individual providing the capital or by transferring assets into the company. You need to be aware if transferring assets, and whether this has tax consequences for Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT).

The founder shareholder normally maintains control over the investments (or appoints an adviser to do so). They also control the payment of dividends and return of capital. This can be done by separating voting rights or within the Articles of Association and shareholders agreement.

When the FIC is created, family members and family trusts are brought in as shareholders and different classes of shares can be issued.

What are the tax advantages of an FIC

There are several benefits of family investment companies including:

• Because an FIC is a company it does not pay tax on UK (and most non-UK) dividend income, compared to the maximum tax rate on dividends paid for individuals of 38.1%.
• Other income in a FIC, whether interest or rental profits, is subject to corporation tax of 19% - 25%, compared to the maximum tax income tax rate of 45%.
• Furthermore, companies are not subject to the restriction on tax relief on mortgage interest, and other finance costs, that individual investors are.
• For capital gains, again, companies pay 19%-25% corporation tax compared to the maximum individual capital gains tax (CGT) rate, for a high-rate taxpayer, of 20%. For individuals, this rate increases to 28% where the gain is on a residential investment property.
• Dividends and salaries can be paid to the shareholders to utilise personal allowances and basic rate tax bands.
• Surplus cash could be used to pay pension contributions for the directors.
• The FIC can be funded with cash or non-cash assets, such as property and other investments, owned by family members.

Other considerations with a family investment company

• Companies do not benefit from the annual Capital Gains Tax (CGT) exemption given to individuals, which is currently £6,000.
• Non-cash assets will be deemed to be transferred at their market value, so a capital gains tax (CGT) charge may arise on the difference between their current market value and the original cost. However, such transfers can be staged over several tax years to maximise each year’s annual CGT exemption.
• The shares in the FIC will ultimately not benefit from any inheritance tax (IHT) reliefs upon death, such as business property relief (BPR), due to it being an investment company, not a trading company.
• However, for inheritance tax purposes, shares gifted during a shareholder’s lifetime will be treated as potentially exempt transfers (PETs) and will escape an IHT charge if the donor survives seven years.

 How do FICs affect inheritance tax?

Inheritance tax planning with FICs can be a tax-efficient way of passing on the shares in the FIC to other family shareholders or new family members. The flexibility they provide whilst maintaining control over your wealth can be attractive to business owners.

Can I put property into a family investment company?

If property is transferred, stamp duty land tax (SDLT) would also be payable by the company, based on the market value of the property. If the property is residential, a 3% additional SDLT rate would be levied on top of the normal SDLT rates.

What is the difference between a trust and a family investment company?

A trust is a legal vehicle that allows you to transfer assets into a trust for the benefit of others. Trustees are responsible for administering the trust. An is a company established to hold a family’s investments, for example, shares in other companies, investment property or share portfolios often without the tax penalties associated with trusts.

Get tax advice from Haines Watts today

However, the flexibility offered means that an FIC can be complex to set up so it’s worth seeking professional advice from people who are experienced in Family Investment Companies. Here at Haines Watts, we will consider both your business and personal circumstances and advise you on the best course of action to protect your family wealth for you and your family members.

For FIC and other tax planning advice, don’t hesitate to get in touch with our offices in Chester, Wirral and Liverpool, we'd be happy to speak with you.

Conclusion

Family Investment Companies (FICs) can be used as an alternative to family trusts. It can enable parents or grandparents to retain control over assets whilst accumulating and passing on wealth in a tax-efficient manner. It allows individuals to pass wealth to future generations and helps with multi-generational succession planning in family businesses.

If you have a trading company with large cash reserves, you inherit significant money, have numerous assets or you have built or are looking to build a property portfolio, then a FIC may be a tax-efficient and flexible way to manage your estate and wealth.