What is a Family Investment Company?

A Family Investment Company (FIC) is a private limited company that helps families manage their wealth. It allows families to invest their money in various assets, like property, stocks, and bonds, all within one structure. This makes it easier for families to keep track of their investments and work together to achieve their financial goals.

A Family Investment Company (FIC) is organised like a typical corporation, with shares held by family members. However, it is specifically designed to assist with wealth management and succession planning within the family. The company is managed by directors, who are typically senior family members, while the younger generation holds shares and benefits from the company’s growth.

One of the main advantages of an FIC is that it provides a flexible and efficient way to manage family assets, providing much greater tax planning options.

Creating and structuring a Family Investment Company

When setting up a company, the first decision is determining the type of company to establish and where it should be incorporated. For families primarily based in the UK, a UK limited company is often the preferred choice, although unlimited companies can also be an option. On the other hand, international families or those planning to leave the UK soon may opt to incorporate an overseas company but choose to make it UK resident by appointing UK directors. This approach means that the company shares are considered non-UK assets for inheritance tax purposes. Furthermore, the company will lose its UK residency status once it is no longer managed and controlled from the UK, though an exit charge will apply when this occurs.

A Family Investment Company (FIC) is typically formed with subscriber shares issued at nominal value to individual family members, usually the parents. Depending on the rights outlined in the company’s legal documents, shareholders are entitled to receive income through dividends and/or returns on capital when they dispose of their shares. The share capital of a FIC is often structured to ensure that control and economic entitlement are kept separate. This allows control to remain with a small number of individuals while the economic interests are distributed among a larger group of family members. Although FICs do not provide as much flexibility as discretionary trusts in terms of income streams and asset protection, some restrictions can be established in the FIC's constitution.

In addition to contributing share capital to the FIC, it is also possible to lend funds. One advantage of this approach is the flexibility to withdraw funds from the structure without the need to take a dividend, which requires the FIC to have distributable reserves. However, if using loans and gifting shares, it is crucial to exercise caution to ensure compliance with anti-avoidance provisions.

A typical FIC structure might look something like this:

An FIC (Family Investment Company) allows parents to maintain control over their investments while gradually transferring wealth to their children. Unlike trusts, which come with strict rules and limitations, an FIC offers more flexibility in how assets are managed and distributed.

Since an FIC is a separate legal entity, it can also provide some protection for the family's assets against events such as divorce or costs related to aged care.

Who Might Benefit from a Family Investment Company?

A Family Investment Company (FIC) can be a great choice for some individuals and families, but it’s not suitable for everyone. There are costs associated with establishing and maintaining an FIC, so it's important to ensure that the benefits justify these expenses.

Here are some scenarios where an FIC might be particularly beneficial:

• Asset-owning individuals Over 50

If you are over 50 and own significant assets, such as property, shares, or other investments, an FIC can help you manage these assets more effectively. It allows you to retain control over your investments while starting to think about your estate planning.

• Families with Substantial Wealth

Families with considerable wealth often have more complex financial and succession planning challenges. An FIC can simplify these processes by providing a clear structure for managing and distributing assets. It’s also a flexible structure that can be added to over time.

• Investors Seeking Tax Efficiency

A FIC can offer various tax advantages, particularly around inheritance tax. By transferring assets into an FIC, you can potentially reduce the amount of inheritance tax payable, ensuring more of your wealth is passed onto future generations. It’s also possible to reduce or avoid other taxes like income tax, capital gains tax, and stamp duty.

• Families Wishing to Involve Younger Generations

A FIC facilitates the gradual transfer of wealth and responsibilities to younger family members. The senior generation can retain control by holding directorship positions, while younger members can become shareholders. This arrangement enables them to learn about asset management and investment strategies, preparing them for the responsibility of managing the family's assets when the time comes.

Types of Assets Held in an Family Investment Company

There are few limits on what an FIC can hold, which makes it a flexible option that can adapt to most portfolios. Common assets include:

Real Estate – Both residential and commercial properties can be held within an FIC, providing rental income and potential capital growth. Property investment within an FIC can be particularly beneficial, due to the preferential tax treatment compared to holding real estate in personal names.

Stocks and Shares – Investing in stocks and shares through an FIC can offer growth opportunities and dividend income.

Bonds, investment funds, and alternative assets – Bonds, mutual funds, and even alternative assets like precious metals and cryptocurrency.

Tax Advantages of a Family Investment Company

Family Investment Companies (FICs) provide several tax advantages that can be beneficial for families aiming to manage their wealth effectively.

One of the primary benefits is that profits can be retained within the company indefinitely. This means that there is no need to trigger potential personal tax liabilities unless the directors decide to distribute dividends.

Although an FIC pays tax itself, these tax rates are often lower than the equivalent personal taxes. Some specific taxes that can potentially be reduced by establishing an FIC include:

• Income Tax

Lower Tax Rates – The profits generated by an FIC are subject to corporation tax, not personal income tax. At between 19% – 25%, corporation tax is currently lower than the higher rates of UK personal income tax, which can be up to 45%. This can mean significant tax savings, especially for those in higher tax bands.

Deductible Expenses – Employee expenses, including directors’ salaries, can be deducted from the company’s profits before calculating corporation tax, as can expenses like mortgage interest on real estate assets.

• Capital Gains Tax (CGT) Savings

Assets sold within the FIC are subject to corporation tax rather than personal CGT, often resulting in a lower tax rate on capital gains. This also avoids the capital gains tax surcharge that’s levied on real estate.

When selling property, the buyer of the property owned by an FIC may also pay less Stamp Duty Land Tax (depending on the structure of the sale), making it more attractive and potentially leading to higher sales prices.

• Dividend Tax Benefits

While dividends are not a specific tax that can be reduced, their flexibility offers significant tax advantages for shareholders of Family Investment Companies (FICs).

For UK residents, shareholders can receive dividends up to a tax-free allowance. Currently, the first £1,000 of dividend income is tax-free, although this will decrease to £500 starting in the 2024/25 tax year. Even for amounts above these thresholds, tax rates on dividends are generally lower than personal income tax rates.

For non-UK residents, there is no UK tax on dividends received, making it an efficient option for income extraction. However, it's important to consider that taxes may still apply to these dividends in the shareholder's country of tax residence.

• Inheritance Tax (IHT) Planning

An Family Investment Company (FIC) provides a more tax-efficient way to transfer wealth to the next generation. By gifting shares in the company to family members, you can decrease the value of your estate and, as a result, lower the potential Inheritance Tax (IHT) liability. It is important to note that normal gifting rules apply to these shares, so seeking professional financial advice on the best approach for making these gifts is essential.

Shares in an FIC can be organised in such a way that they fall within the nil-rate band, which is currently £325,000 per person or £650,000 for married couples. This structuring could potentially allow you to avoid IHT altogether.

Trusts vs. FICs

In addition to Family Investment Companies (FICs), trusts are another primary legal structure used for managing family wealth and planning for future generations. Both options have their own advantages and disadvantages, so understanding the differences between them can help you determine which is best suited for your family's needs.

Key Differences Between FICs and Trusts

Here are some of the key differences between both of these asset management options:

• Control and Flexibility

Trusts – Trusts are managed by trustees who have a legal duty to act in the best interests of the beneficiaries. While those who set up the trust (the ‘settlor’) can maintain control over the funds as trustees, they have more limited scope to access the assets themselves, as that isn’t likely to be in the best interests of the beneficiaries.

FICs – In an FIC, the senior family members usually retain control as directors, but can also be shareholders of the company. As well as options such as providing the initial assets as a director’s loan, provides more flexibility for the older generation to access funds than a trust. At the same time, it still retains the ability to pass assets and income to the younger generations.

• Tax Treatment

Trusts – The tax benefits associated with trusts have diminished over the years. Trusts do not receive a personal allowance and are subject to income tax at a rate of 45%. When distributions are paid out to beneficiaries, they can claim a rebate based on their own tax rate, allowing them to recover a portion of this tax.

Additionally, capital gains tax applies to the assets held in trusts. The full tax regulations regarding trusts are quite complex, but in summary, trusts are often not significantly more tax-efficient—if at all—than simply holding assets in personal names.

With that said, gifts into trust start the 7 year clock for gifts from an Inheritance Tax (IHT) perspective, which makes them a worthwhile option to consider if reducing IHT is a key objective.

FICs – Family Investment Companies (FICs) benefit from lower corporation tax rates on profits, which currently range from 19% to 25%. These rates are generally lower than personal income tax rates. Shareholders can receive dividends that may be subject to tax-free allowances and reduced dividend tax rates.

Additionally, FICs offer several other tax advantages, such as potentially lower levels of stamp duty on transactions and the absence of a separate capital gains tax. Furthermore, inheritance tax can be minimized by gifting shares in the FIC to family members, similar to the way gifts can be made into trusts.

• Administration and Costs

Trusts generally have lower setup costs compared to FICs, but ongoing administrative costs can be higher due to the need for professional trustees and compliance with trust regulations.

• Succession Planning

Trusts – Trusts provide a clear legal structure for passing assets to beneficiaries, often used for protecting young or vulnerable family members. However, the rigid structure can limit flexibility in how and when assets are distributed, and the assets generally can’t be paid back to the settlors.

FICs – FICs allow for gradual wealth transfer through shareholding, making it easier to manage succession planning. Shares can be gifted over time, reducing inheritance tax liabilities and ensuring a smooth transition of wealth.

Choosing Between an FIC and a Trust

Choosing between a Family Investment Company (FIC) and a trust depends on your family's unique circumstances and financial objectives. An FIC might be a better choice if you desire more control and flexibility in managing family assets, along with the potential for lower tax rates. Conversely, a trust could be the more appropriate option if you need a clear legal structure to protect beneficiaries and facilitate wealth transfer.