Family Investment Companies – What are they and should you consider one?

What Is a Family Investment Company?

A Family Investment Company (FIC) is a private company, incorporated under the Companies Act 2006 (or equivalent overseas legislation), created specifically to hold investments on behalf of a family.  Its primary purpose is typically to facilitate the tax-efficient transfer of wealth across generations, providing a robust and structured approach to family wealth management.

Funding and Structure of a FIC

A FIC can be funded in several ways, but the most common method involves a senior family member transferring assets (such as property, cash, or other investments) to the company in exchange for shares or loans.

FICs offer flexibility via the utilisation of a variety of share classes to potentially separate out voting rights, dividend income rights and/or rights to the company’s capital value etc.  While ordinary shares, granting voting rights and a share of profits, are most common, preference shares can also be issued.  Preference shares take priority over ordinary shares for dividend payments but typically do not carry voting rights.

A FIC allows families to balance control and wealth transfer.  Senior members can keep voting rights while passing wealth to younger generations who may not be ready to govern.  Different share classes can help with this.

The FICs structure can be adjusted to the family’s needs, with rights and restrictions set in the Articles of Association or Shareholder’s Agreement, such as limiting shares to family members or trusts.

Because FIC governance can be complex, specialist advice is recommended when setting it up.

Tax Considerations for a FIC

Gifts to a FIC are treated as Potentially Exempt Transfers (PET) for Inheritance Tax (IHT). If the donor survives seven years, the assets fall outside their estate.  However, shares in the FIC may be subject to IHT at death, potentially valued lower depending on holdings. Gifts may trigger Capital Gains Tax (CGT), though reliefs may apply.  FICs are taxed at 25% Corporation Tax (CT), lower than higher-rate income tax, with possible deductions for management expenses and exemptions on dividends, though exceptions exist.  Given the complexities, expert advice is strongly recommended to understand these rules and ensure the most beneficial approach.

Key Advantages of a FIC

• Tax Efficiency: Potential benefits for IHT planning and lower corporation tax rates compared to higher and additional rate income tax.
• Control: Founders and senior family members can retain control through voting rights, while younger generations can benefit from learning about the operational management of the company.
• Flexibility: Easy addition or removal of shareholders, with the ability to declare dividends at different times to utilise annual allowances and tax thresholds.

Key Disadvantages of a FIC

• Double Taxation: If dividends are extracted, recipients may face personal income tax liability (subject to their dividend allowance), potentially leading to double taxation. However, if the FIC is focused on wealth accumulation, dividends may not be distributed frequently.
• Property Tax Considerations: If the FIC holds residential property, there may be additional tax considerations, such as the Annual Tax on Enveloped Dwellings.
• Limited Reliefs: FICs do not qualify for Business Property Relief (BPR) or Business Asset Disposal Relief (BADR), which could limit potential IHT or CGT relief.
• Exposure: Compared to trusts, FICs offer less protection in situations like bankruptcy or divorce proceedings.
• Administrative Costs: Ongoing administration, including corporation tax returns, accounts, and filings with Companies House, can incur costs.

FICs can be an effective tool for tax-efficient wealth preservation and succession planning, but, whether a FIC or a trust structure is more appropriate depends on your family’s specific needs.

Each option has advantages and considerations, and it’s crucial to seek expert advice to determine the best approach for you.  Also, look out for our next article on FICs, where we will explore the comparisons between an FIC and a Trust in more detail.

For further information, advice or guidance, please contact our Wealth Preservation team.