23rd November 2021
A family investment company (FIC) is a bespoke vehicle that can enable parents to pass wealth to the next generation while retaining a measure of control over the family assets.
A FIC is a private company, either limited or unlimited, where the shareholders are family members who typically hold different classes of shares. The parents will typically hold voting shares while the children would be issued non-voting shares with rights to receive dividends. The governing articles can be tailored to suit the specific needs of the family and cover the distribution of company profits, the return of capital, the transfer of shares and the appointment of directors.
The directors (usually the parents) will have the day-to-day control of the company and make relevant investment decisions.
In addition to facilitating the transfer of wealth to the next generation, the FIC can, if managed efficiently, reduce the family’s overall tax burden.
Benefits of a FIC
A FIC can be set up by transferring cash or assets into the company. The initial transfer of assets into a FIC is not subject to an Inheritance Tax (IHT) entry charge of 20% if the cash/assets exceed the nil rate band of £325,000. This makes the FIC more attractive to families than the traditional trust which limits the funds that can be settled free of IHT. Also, unlike a trust, there are no IHT 10-year charges or exit charges if and when capital is distributed.
The transfer by the parents of cash/assets into a FIC and the subsequent issue/gift of shares to the children can remove value from the parent’s estates and thus reduce the IHT exposure on their deaths. The gift of shares to the children will not be subject to IHT, provided that the parents remain alive for seven years from the date of the gift.
The profits of the FIC are charged to Corporation Tax (currently 19% but increasing to 25% from 1 April 2023), which is lower than the rates of Income Tax and Capital Gains Tax (CGT) for individuals. Holding investments through a FIC rather than personally can result in significant tax savings for the family.
The value of the FIC shares held by the shareholders can be discounted for IHT purposes because they usually hold a minority interest in the company. This can result in a significant IHT saving on the death of a minority shareholder.
Disadvantages of a FIC
A FIC can be tax inefficient if all of the company profits are paid out to the family as this creates the potential for double taxation. The company pays Corporation Tax on its profits and then the shareholders will pay Income Tax when profits are distributed in the form of a dividend. The FIC is therefore more tax efficient if the profits are retained in the company.
If assets, rather than cash, are transferred into the FIC, this may trigger a CGT charge and if property is transferred this could trigger a Stamp Duty Land Tax charge. A transfer of cash is by far the best option to minimise the family’s tax exposure.
The set-up costs and the ongoing administration such as completing annual accounts and Corporation Tax returns can make a FIC unattractive and therefore, the FIC is recommended for initial investments in excess of £1 million.
A FIC will not be suitable for all families but if you wish to discuss how a family company could benefit you and your family please speak to your usual contact at haysmacintyre.