Keeping it in the family
Keeping it in the family
A Guide to: Family Investment company (FIC)
A FIC is a private investment company where the shareholders and director(s) are individual family members
They act as a way of mitigating IHT by effectively removing investment growth from your estate for IHT purposes.
Anti-avoidance and settlements legislation are considerations that need to be navigated carefully when considering a FIC
Over the last few years, Family Investment Companies have become a popular alternative to trusts as a tax efficient investment vehicle, particularly for clients who wish to roll up and reinvest the income and gains generated by their investments.
For the right person and in the right circumstances an Investment Company can prove to be an effective estate planning tool, enabling families to pass on wealth in a controlled, flexible and tax efficient way.
They tend to work best for those with a substantial amount of money to invest, at least £1m in order for the structure to be cost effective, and for those who are willing to park funds in a company for longer term tax efficient growth. It is less appropriate for those who wish to continually access the funds.
What is a FIC?
A FIC is a bespoke structure that should be designed and built in line with how you want it to work for you and your family. It can be designed and adapted to your unique circumstances and they range from routine to very complex. They are not ‘one size fits all’ and there is a lot of traps, pitfalls and anti-avoidance that needs to be carefully managed when designing and implementing a FIC. For this purpose I have provided a basic overview of a typical structure advantages/disadvantages etc for illustrative purposes.
A FIC is a private investment company where the shareholders and director(s) are individual family members. Over recent years FIC’s have become an increasing popular alternative to family trusts, although I find that they can be very effective when used in conjunction with a family trust.
The concept of a basic FIC is to provide an investment vehicle for some of your wealth, providing tax efficacy, thereby reducing tax leakage to maximise investment returns, provide flexibility, wealth protection and preservation.
A FIC can be structured in such a way to allow the income realised in the structure to be passed to other shareholders (e.g. children) without you having to give up control over the underlying assets in the FIC. This can provide tax advantages by enabling income to be directed to those with lower marginal tax rates. In addition, a FIC can act as a means of retaining control of assets whilst giving away value and future growth, thereby mitigating IHT by effectively removing investment growth from your estate for IHT purposes.
If structured correctly a FIC can be set up so that you can retain access to the capital invested in the FIC but you can continue to access tax rates that are likely to be considerably lower than if you held the assets personally or in a trust.
FIC’s offer a tax efficient way of accumulating wealth. Income and gains received by the company are subject to corporation tax at 19%, which compares favourably against income tax charges at up to 45% on fixed income. Most dividend income received by a FIC is exempt from Corporation tax, whereas dividends received by an individual or discretionary trust is taxed at up to 38.1%
Lower tax rates and the ability to offset costs, such as investment management charges and interest charges, means that investment returns are not eroded in the same as way as for personal or trust investments. This leaves more funds to reinvest each year, which can result in considerably better performance (compounding) than if held personally or in trust.
Income can be rolled up in the structure and/or distributed to shareholders as and when you decide.
If structured correctly then there is generally no immediate charges to IHT when funds are transferred to a FIC, whereas an upfront charge of 20% can apply in respect of gifts made to trusts. In addition, there are no 10 year anniversary charges in the same way that there are for trusts.
The difference between income tax rates make the use of the company an attractive vehicle to hold investments and roll up investment returns, whilst at the same time providing IHT benefits.
Need more details?…
A FIC offers a substantial degree of flexibility, allowing you to tailor the structure to meet any changing needs over time. Flexibility can be achieved by using different classes of shares (controlling and income), discretion over dividend payments, loans and assignments to access capital, gifting shares, shareholders agreement and so.
You can retain control of the FIC and its underlying assets. Control can be achieved by any combination of voting (controlling shares) and non-voting shares (usually income and capital shares), directorships and directors powers, the articles of association, the shareholders agreement and pre-emption rights.
A FIC can be established as either a private limited company or a private unlimited company. Where privacy is preferred then one can be set up a FIC as an unlimited company (this is quite common in practice), which has reduced filing requirement with companies house and is not obligated to file annual accounts.
A FIC can be a useful mechanism of protecting family assets and wealth.
The veil of incorporation is a concept of company law which describes the protection and privacy offered by a limited company due to it being a distinct legal entity, independent from its directors and shareholders. FICs may therefore provide useful protection in the event of divorce or errant relationships, as the assets in the FIC are generally beyond the reach of the Family Courts.
Assets are owned by the company and not by the shareholders. A company cannot (except in cases of impropriety) be compelled to declare dividends or distribute assets. The same protection is not available if the assets are held personally or in a trust.
There are a host of ways to fund a FIC. The method that you opt for is typically dictated by your objectives/tax driver, desire to maintain flexibility, access to capital and control. Usually a FIC is funded either by way of a loan or by share subscription by some or all of the shareholders. Sometime assets are passed directly to the FIC although capital gains tax needs to be considered.
Where you probably need advice…
Anti-avoidance and settlements legislation are considerations that need to be navigated carefully when considering a FIC. In addition, care needs to be taken regarding double taxation, with profits being subjected to both corporation tax and income tax when funds are being extracted. Although much of this can be managed by careful distribution of income utilising and assigning loans etc, a FIC is generally not appropriate where one needs regular access to the funds being invested or the income generated.
As with all structures there are costs to implement and to operate a FIC but typically the cost would be won back in tax savings in the first year or so.
There is an administrative burden as standard company administration must be completed including preparing annual accounts and corporation tax returns etc but it is not to dissimilar to that of a trust.