What is a Family Investment Company?
A family investment company or FIC is nothing new. It is just a company which is used for investment purposes and people have been doing this for decades. So, you may ask why has the FIC become so popular in recent years?
The reasons are twofold:
- assets held in a FIC are outside of your estate when calculating any liability to inheritance tax (IHT) (subject to proper structuring), in which case no IHT is payable on such assets; and
- in 2006, the government made a change to how trusts are taxed making them less attractive to hold investment assets. In comparison, corporation tax (the tax paid by companies) has reduced from 20% (in 2015) to the current rate of 19% (although is due to increase to 25% for trading companies with profits in excess of £250,000from April 2023).
If you hold assets personally in your own name, such assets may be subject to IHT on death as well as profits earned during your lifetime could be charged to income tax at rates of up to 45%.
Why use a Family Investment Company?
In simple terms, the reason is wealth accumulation. As a FIC pays less tax than you would if you personally invest in assets or held them in a trust, the income earned or payment received on the sale of those investments, are taxed at a lower rate, which means the FIC has more money to re-invest in further investments. Over a number of years, provided that the FIC re-invests its gains, it will accrue greater wealth faster.
Following the Budget in early 2021, it was announced that corporation tax for companies will increase from 19% to 25% (although the 19% rate will still apply to companies with profits below £50,000 and a marginal rate for companies with profits between £50,000 and £250,000). FIC’s are usually split into 2 types in that they hold one or the other of the following types of investment:
- Property – in which case, the FIC will be treated as a trading company and the 19% rate will apply for profits under £50,000 and thereafter the additional rates will apply; and
- Stocks and Shares – such companies will be treated as “closed investment companies” and therefore will be taxed at 25% corporation tax regardless. However, if such profits are paid to the FIC by way of dividends, then such payments are exempt from corporation tax in any event.
Accordingly, even with the increased corporation tax rates from 2023, there are ways to mitigate such corporation tax which means that FIC’s are still attractive for wealth accumulation, especially when compared to paying income tax.
For these reasons, FICs are set up for the long-term and not the short-term, the idea being that the founders of the FIC, being mum and dad, set up the FIC and inject the initial funds to invest in assets. Their children (and maybe their grandchildren) will also be shareholders and benefit from the growth created by the investments held by the FIC.
Another reason is that FICs like all companies have their own legal identity separate from the shareholders that own the shares in them. This has 2 benefits in that (a) the shareholders of the FIC benefit from limited liability (i.e. losses are limited to the value of the shares held by the shareholders), and (b) as mentioned above, the assets held by the FIC are exempt from IHT (provided the FIC is properly structured).
FICs are therefore a very tax-efficient company structure to maximise the accumulation of private wealth whilst also ensuring that any future IHT bill is kept to a minimum.
Structure of a Family Investment Company
The structure of the FIC will vary depending on your circumstances (i.e. family and existing assets). However, there are some common elements, including:
- We regularly use trusts to hold the shares on behalf of the children/grandchildren which will not accumulate any wealth themselves, but are used as a tax-efficient way of passing the wealth on to the family members, whilst retaining control.
- Limited or Unlimited? Whether the FIC is set up using a private company with limited share capital or a private company with unlimited share capital. The main difference is that unlimited companies are not required to file accounts at Companies House (retaining some of the privacy of the family’s wealth). However, unlimited companies do not have the benefit of giving the shareholders limited liability which may be an issue if the FIC invests in trading businesses or the disposal of assets in the future.
- Introduction of Assets. Usually, the founder of the FIC will either gift or loan assets to the FIC, but this will depend on the nature of those assets and whether there are any tax consequences on transfer. We have seen cash, property, equity securities (i.e. shares), artwork and even classic cars being held by FICs.
- Different classes of share will be issued to the founders and their children/grandchildren. This ensures that the value arising from the growth of the assets held in the FIC are passed to the children and not retained by the founders (therefore minimising exposure to inheritance tax). The different classes also create flexibility on the distribution of income and assets. It is therefore vital that the FIC has a detailed shareholders agreement and/or articles of association to provide for this flexibility and control. Such documentation will also ensure that the only shareholders of the FIC are the intended family members.
Setting up a Family Investment Company
If you are considering using a FIC, there are a number of initial steps that you need to think about, such as how much you are going to invest in the FIC and what assets the FIC will invest in, are these existing assets or new assets?
Whilst we can advise you in relation to the legal structure of the FIC and drafting the relevant documents, you should also seek advice from your accountant or tax advisor and your financial advisor. If you don’t have such advisors, we would be happy to make the necessary introductions.
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