Family Investment Companies (FICs) have gained significant traction in the UK in recent years as a strategic tool for wealth management, succession planning, and tax efficiency. This surge in popularity is partly due to ongoing changes in UK legislation that have made traditional trusts less attractive.
The current rules on the taxation of trusts, which impose a 20% inheritance tax (IHT) charge on lifetime transfers into trusts exceeding the nil-rate band of £325,000, has led many to explore FICs as an alternative vehicle for preserving and growing family wealth.
Here, Haines Watts Leicester Director Shazin Tayub explains what you need to know about how FICs work, when to use them and how to get started protecting your wealth for the future.
What is a Family Investment Company?
A Family Investment Company (FIC) is a private limited company established with the primary purpose of managing and investing family wealth.
Typically, an FIC is created by parents or grandparents, the founders, who act as directors controlling the company while their family members, typically children or grandchildren are shareholders who benefit economically from the investments.
Unlike trading companies, FICs focus on holding investments such as stocks, bonds, and property. The structure of a FIC can vary, but it usually involves shares with different rights to ensure control remains with the founders while economic benefits are distributed among family members.
What is the Value of a FIC?
Wealth Accumulation and Tax Efficiency
One of the primary advantages of a FIC is the ability to accumulate and manage wealth efficiently. Since FICs are subject to corporation tax, which is currently lower than the top rates of personal income tax, they offer a tax-efficient means to grow investments.
For instance, while personal income tax rates can be as high as 45% (48% in Scotland), corporation tax on FICs is payable at 25%. This difference can result in significant tax savings, especially when reinvesting profits within the company.
Succession Planning
FICs provide a structured and controlled way to pass wealth to future generations. By using shares with varying rights, parents can retain control over the company's decisions while gradually transferring economic benefits to their children or grandchildren via a Family Trust.
This method can be particularly useful for families looking to ensure that wealth is preserved and responsibly managed over time. Additionally, by gifting shares to their adult children or a Family Trust, families can benefit from potential inheritance tax advantages, as the value of these transfers can fall out of the donor's estate, if the donor survives the gift by seven years. This potentially saves inheritance tax in the longer term.
Asset Protection
Another significant benefit of FICs is asset protection. By holding investments within a company structure, families can shield their wealth from personal liabilities and creditors. This can be especially advantageous for families involved in trading businesses, as it allows them to separate trading risks from their investment assets.
FICs are typically set up along with a Holding Company, giving an additional option whereby the trading company may transfer surplus cash further protecting assets from claims by creditors of the trading company.
When is a FIC Not Suitable?
While FICs offer numerous benefits, they are not suitable for every situation. Establishing and maintaining a FIC involves considerable costs and administrative efforts. Setting up an FIC can be quite costly, together with the ongoing administrative expenses of dealing with the annual accounts, company law requirements and corporation tax returns. Therefore, FICs are generally a viable option for families with significant assets to invest, typically over £1 million.
Additionally, certain types of investments might be better held outside of a FIC. For instance, investments benefitting from specific tax incentives, such as the Enterprise Investment Scheme (EIS) or Business Property Relief (BPR), may not receive the same advantages within a corporate structure. Furthermore, where residential property valued at least £500,000 is held in an FIC it would typically be subject to the Annual Tax on Enveloped Dwellings (ATED), which would impose additional costs.
How to Set Up your FIC
Initial Setup
We can help you set up a Family Investment Company, a process involving several steps:
- Incorporation: The first step is incorporating the company, which involves registering it with Companies House. This process includes choosing a suitable name, drafting articles of association, and issuing shares to family members.
- Share Structure: Defining the share structure to balance control and economic benefits. Typically, founders hold voting shares, while other family members hold non-voting shares that entitle them to dividends and capital growth.
- Funding: The FIC can be funded through direct capital contributions or loans from the founders. Loans can offer flexibility to the founders as they can extract funds without the need for dividends and the related income tax charge that would follow, potentially at the top dividend rate of income tax of 39.35%.
Ongoing Management
We can also offer support once the FIC is established, as it requires regular management and compliance with statutory requirements:
- Accounting and Reporting: Maintaining accurate records and filing annual accounts with Companies House.
- Tax Compliance: Ensuring compliance with corporation tax obligations, including the submission of annual tax returns and advising on payment of corporation tax due.
- Dividends and Distributions: Managing the distribution of dividends and other payments to shareholders, taking into account the tax implications for both the company and the recipients.
How we can help you approach your FIC strategy
Given the complexities involved in setting up and managing a FIC, both in planning whether to use one and how to administer and use it for maximum benefit to you and family, it pays to have the right advice in your corner.
Haines Watts has worked with thousands of business owners to help them make the most of the business structures available to protect and grow their wealth. Our team of experts can help you work out the best approach for your business to allocate, access and grow your assets with an eye to the future to support your family in the years to come.
