A Family Investment Company (“FIC”) is essentially a regular UK-resident company whose shareholders are comprised of exclusively family members. Usually, its primary function is to pass down wealth to a family’s future generations. They are normally founded by a senior family member with material collateral, who transfers cash/assets into the FIC in exchange for a combination of shares and loans.
Sometimes it may be appropriate to take an existing company that has investments or cash and look to change the approach to treat it like a FIC, this could mean changing the shareholdings and perhaps introducing a shareholders agreement etc.
What are the key benefits of a Family Investment Company?
There are multiple benefits that arise from the existence of a FIC, from succession planning to tax efficiency:
- Effective method of transferring assets to family members with a view to mitigating Inheritance Tax.
- Flexibility when determining the terms of the degree of control each family member has.
- Profits of a FIC will be taxed at Corporation Tax rates of 19% or 25% as opposed to the higher rates of Income Tax at 40% or 45%.
- A FIC receiving qualifying Dividend income will not be liable to Corporation Tax on it.
- Gifts of shares in a FIC qualify as potentially exempt transfers and will fall out of the transferor’s estate for Inheritance Tax purpose, however this is always subject to advice on the availability of the nil rate band of £325k alongside the interaction with Capital Gains Tax. Advice should always be sought before making a gift of this nature.
- FICs can claim Corporation Tax deductions on expenses incurred while managing investments.
- It may be possible to structure a FIC in a way that allows cash to be withdrawn in a tax efficient manner, but this requires specialist advice.
What are the disadvantages of a Family Investment Company?
- The maintenance costs involved in running a FIC are high, and they are perhaps only practically viable for families with sums £1 million or so.
- If the FIC owns residential property valued at over £500,000, they may fall foul of the Annual Tax on Enveloped Dwellings regime.
- FICs cannot benefit from Business Asset Disposal Relief, Business Property Relief or an Enterprise Management Scheme.
- Can be difficult to get money out of a FIC, and often more tax efficient to leave the company’s profits in the company and reinvest these.
- Certain capital assets would trigger a Stamp Duty Land Tax or Capital Gains Tax liability when transferred into the FIC.
- Do not create a FIC if you have a strained family dynamic, as they can lead to potential family feuds.
Why Stratos?
Stratos can help you navigate the intricacies of setting up a FIC, such that the company is best structured to suit your unique family situation. We offer guidance relating to:
- The design of your FIC shareholding and loans such that it best suits your family dynamic requirements whilst maximising tax benefits
- The implementation, maintenance, and cessation of your FIC.
- Ongoing communication regarding reliefs and compliance requirements with HMRC and Companies House.
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Case Study
Structuring Property Investments to Minimise Inheritance Tax Liability
The Challenge
Mr and Mrs Jones owned 50% each of the equity in a company that already owned a material amount of investment property. Inheritance Tax in relation to their shares in the company became an issue (with an estimated liability of £2m) so they asked Stratos how to plan around their holding.
The Solution
As the company already had material positive value in its equity the shares couldn’t be passed by Mum and Dad to their children without incurring Capital Gains Tax. Therefore, they adopted our advice which was to ‘Freeze’ their own equity in the company and give ‘Growth’ shares to the children.
The Value
This allows any future increases in the equity to accrue in the children’s estates, rather than theirs.
FAQs
FICs are usually most useful where there is a meaningful investment portfolio or property wealth to manage. Running costs and administration mean they should be considered carefully before implementation.
Often, yes. A carefully designed share structure can allow senior family members to retain voting rights or income rights while future growth is directed to younger generations.
A FIC can form part of inheritance tax planning, but it must be structured carefully and reviewed alongside wider estate, capital gains tax and income needs.
Potentially, but property introduces additional tax issues including SDLT, ATED, financing, rental income, capital gains and future extraction of value.
The reporting requirements for a FIC are no different from any other limited company. They must be registered on Companies house, and therefore complete annual accounts, confirmation statement and tax returns.
There are no specific requirements in order to qualify as a FIC. However, it is generally accepted that the shareholders be primarily family members and the business be used for investment purposes solely, as opposed to the usual business purpose of trade.
It is up to you how you decide to allocate the shares within a FIC, but they are generally incorporated with subscriber shares that are issued to the senior members of the family. Senior family members would often also receive the majority voting rights, as they are providing the company with direction. Younger family members generally receive capital rights, as they will be the most to benefit from the equity of the company.
Rights to dividends may be shared between generations.
Yes, it would be sensible for each shareholder to sign up to an agreement with fairly normal restrictions such as pre-emption rights. Pre-nup agreements should be considered by those who marry whilst owning equity in a FIC. Any such agreements should be drawn up with advice from a lawyer.
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Family Investment Company Tax Advice | FIC Planning
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