Family investment Companies – the ‘need to knows’ for succession planning

What are the potential benefits of a FIC?

Flexibility – different share classes can be created to assist with individual family members’ tax planning strategies or to provide for specific scenarios, e.g. to protect vulnerable members of the family or the release of income at different times to different shareholders.

Control – various options exist to provide control.  Pre-emption rights can determine how shares pass upon the death of a shareholder, rather than being dictated by the deceased’s Will or the intestacy rules.

Asset protection – the FIC’s governing documents may seek to limit a shareholder’s ability to realise economic value from their shares or to provide that only certain people, e.g. family members, may be shareholders.

Duties – family members may act as directors of a FIC and, whilst they have some duties to the company, they should not be subject to the same high level of fiduciary duties as trustees.

What are the potential drawbacks of a FIC?

Complexity – establishing and running a FIC may involve considerable planning and revisiting this as family circumstances change. A FIC may not suitable if short term advantages are sought.

Privacy – constitution documents and other information about the company is publicly available at Companies House, affording less privacy.  However, confidential matters may be dealt with separately, for example, in a shareholders’ agreement.

Administration – there are ongoing filing and administrative requirements to running a FIC, including preparing and filing accounts, tax returns and Companies House filings.

Tax treatment?

Corporation Tax

A FIC is taxed in the same way as any UK resident investment company. Profits are usually subject to corporation tax at a rate of 25%, whilst dividends may be exempt.

Capital Gains Tax (CGT)

CGT may be due on gains arising on assets when contributed to a FIC (subject to the availability of exemptions).  Transfers may be made over time to take advantage of tax-free allowances and lower tax rates.

Inheritance Tax (IHT)

The initial funding for a FIC will usually be a potentially exempt transfer. Accordingly, provided the founders survive seven complete years from the date of the gift, no IHT will arise. This is unlike the initial funding for a trust (which is typically limited to £325,000 without an IHT charge arising, unless reliefs are available).

On the death of a shareholder, their shares will form part of their estate for IHT purposes.  They may attract a discount on the basis that the FIC is jointly owned and the deceased had a minority holding.

Potential for double taxation

Overall, investment income within a FIC may be subject to materially lower taxation than the higher rates for individuals or discretionary trusts, making FICs an attractive vehicle in which to accumulate wealth. However, these benefits may be offset by tax costs of extracting profits from a FIC, which can result in double taxation.

How can Greenwoods help?

We can assist with the following:

• advice on the suitability of a FIC and alternative options;
• incorporation of a FIC and compliance with Companies House formalities;
• preparation of bespoke articles of the FIC;
• preparation of any side agreements to help regulate ongoing family governance;
• assistance with the ongoing administration of the FIC and the Companies House filings;
• advice on UK tax issues arising upon the addition of assets to a FIC, including how these may be mitigated, and advice on taxation of its profits;
• advice on how shares in the FIC may be gifted;
• advice on how a FIC can be incorporated into wider succession planning and asset protection steps, which may include advice about Wills and powers of attorney; and
• assistance with UK personal tax filings that may be required.

If you’re wondering if a FIC might be right for you and your family, please contact a member of our Wealth Preservation Team.