Could a Family Investment Company be right for you?

A family investment company (FIC) is a popular structure used as an attractive alternative to trusts to hold family wealth in a tax efficient way. They are frequently used in inheritance tax planning but can also provide other tax savings.

What is a Family Investment Company?

In its simplest form, to set up a FIC, you create a limited company with different classes of shares, with the shareholders being your family members, and you put cash or investment assets into the company. The different classes of shares may carry different rights to dividends, votes, and capital on a winding up.

Typically funds are provided to the company by subscribing for shares or providing loans to the company.  If a parent sets up the company and their children’s shares have rights to the capital in the company, then the use of the FIC reduces the parents’ wealth, as future property growth accumulates outside of their estate for inheritance tax purposes.

You can maintain control of the assets in the company by being a director of the company and through your share rights giving you voting control, whilst accumulating wealth in the company and distributing profits as you see fit.

Benefits of a FIC

There are a few reasons to consider setting up a FIC:

• Profits in the FIC are subject to corporation tax which is currently lower than income tax.
• FICs allow for income tax planning to utilise each shareholder’s personal allowance and basic rate band.
• Most dividends received by a FIC are exempt from corporation tax.
• Management expenses and mortgage interest incurred by the FIC are eligible for corporation tax relief.
• If the FIC is established using interest free loans, the lender can extract funds in the form of loan repayments as an alternative to receiving dividends.
• Future property growth can accumulate outside of the parents’ estate.
• Transferring cash into a FIC is not subject to inheritance tax.

Disadvantages of a FIC

HMRC has set up a “secret unit” to look at how FICs are being used in inheritance tax planning.  The FIC structure is very popular with UK-based high net worth families so it is perhaps no surprise that HMRC is looking closely at these structures. It is possible in the future that HMRC will impose certain rules and charges on FICs to ensure no loopholes are being exploited. If you do choose to set up a FIC, we recommend that the structure is regularly reviewed to ensure that it remains effective and appropriate for your family.

There is a cost to setting up a FIC, including accountants and solicitors.  If existing family investments are to be transferred into the company there may be capital gains tax and stamp taxes charges.

Is this right for your family?

A FIC typically works best if you have a significant amount to invest, and plan to grow the wealth in the company, rather than regularly paying dividends.

Family trusts remain a viable alternative, and in some cases are combined with a FIC by a discretionary trust being a shareholder in the FIC.

Before setting up a FIC you should ensure you have obtained the appropriate tax, practical and legal advice.  If you would like any assistance, or have any questions, please let us know.