As traditional estate planning tools like trusts have become increasingly complex and restrictive, Family Investment Companies (FICs) have emerged as a popular alternative for high-net-worth individuals and families. FICs offer a flexible and tax-efficient way to manage, grow, and transfer wealth across generations.
With the increased popularity of Family Investment Companies, we’ve asked Jonathan Jones, Senior Client Manager, to outline everything you need to know about Family Investment Companies.
What is a Family Investment Company?
A family investment company is a private company whose shareholders are members of the same family. These companies are established to hold and manage a family’s investment assets, such as cash, securities, real estate, and other financial products.
FIC’s are used to:
- Reduce inheritance tax
- Pass wealth to family members in a controlled, flexible and tax efficient manner
Mitigate IHT
Inheritance Tax Mitigation FICs can help reduce inheritance tax (IHT) liability in several ways. First, the increase in value of the company’s investments accrues to other family shareholders, rather than the founder’s estate. Second, FIC shares may qualify for “minority discounts” for IHT purposes, reducing their value by up to 75%. Finally, the founder can draw down on their loan to fund living expenses or gift their loan to family members, further removing assets from their taxable estate.
Passing Wealth
Generally, FICs are structured to allow the passing of wealth (income and/or capital) to other family members at the discretion of the controlling founder. This can be structured to utilise family with lower marginal rates of tax.
Structure
The founder may wish to retain control as a director and/or through voting rights. Key elements of a FIC structure include:
- Director – Responsibility for strategic decisions regarding investment and dividends
- Share Rights – Votes, capital and dividends
- Governance – Articles of associates, shareholders agreement, family constitution
It is possible to create separate classes of share so that differing dividends can declared in respect of each class of share (rather than paying dividends in proportion to the shareholdings). Thereby, dividends can be paid to family members to utilise their allowances and lower marginal rates of tax.
Funding
Typically, cash funds are introduced by the founders into a company either by subscribing for shares or by way of a loan. This may be after the sale or liquidation of a business or upon receiving an inheritance.
A FIC may also be funded by transferring assets (for example, quoted shares or rental properties) into a company. But, the capital gains tax and stamp duty implications need to be considered.
Taxation
Tax on income – Companies pay corporation tax on income at 19% or 25% from 1 April 2023 (most dividends received are exempt from corporation tax). This compares with personal income tax rates of up to 45%. As such, there is a significant benefit in accumulating investment income within the FIC.
Expenses of management – Expenses of management are generally deducted from a company’s total profits. By contrast, expenses incurred by an individual in managing his personal investment portfolio such as investment managers’ fees or employee remuneration are not deductible for tax purposes.
Interest – Relief is not available or restricted for interest (i.e. finance costs for individual landlords) on loans taken out by an individual to finance his investment portfolio. By contrast, relief is available for companies’ borrowing costs to finance investment business.
Extraction of Funds
It is advantageous to accumulating investment income within the FIC as it will result in an increase in wealth (say, an increase of 20% compared to a trust or an increase in 33.75% compared to a higher rate individual). As such, the extraction of funds often defeats the purpose of the FIC.
Nevertheless, there are great tax planning opportunities to extract funds particularly where there are members of the family who are non-taxpayers (for example, children at university) or are non-resident or possibly where they are only basic rate taxpayers (e.g. post retirement).
Funds may be extracted by way of:
- Dividend
- Salary
- Pension contributions
- Loan repayments and interest
- Capital distribution
Here to help
FIC’s have become an increasing popular structure to:
- Reduce inheritance tax
- Pass wealth to family members in a controlled, flexible and tax efficient manner
But it is imperative that a FIC is structured properly with careful planning undertaken for funding, tax issues, extraction of funds and IHT mitigation to avoid any draconian pitfalls or problems.
FIC are incredibly valuable when structured correctly. If you’re thinking about setting up a Family Investment Company, we are here to help. To get in touch with our expert team today, fill out the form below and we’ll be in touch shortly.
