Understanding Family Investment Companies (FIC) in Estate Planning
Estate planning is organising your family’s wealth so that it is protected as far as possible, that it passes to the next generation, control is retained over assets where appropriate, with ongoing income and minimised exposure to tax.
A FIC is one of the tools that can help, there are others to consider and the choice will depend on the family’s priorities.
Trusts can also have an important role to play, striking a balance between the way in which the assets are held and the different tax regimes that you may be exposed to.
A FIC is just a straightforward limited company formed under the 2006 Companies Act. The advantage is that ownership rests with the shareholders and control is the responsibility of the directors. Your family members can be both.
The family members (and possibly even the family’s trusts) would normally own the shares in the FIC. The articles of association will include a number of bespoke provisions to ensure control is retained and the assets are protected as far as possible within the company. There is usually a supporting shareholder’s agreement in place as well to define what happens to the shares in the future.
A company structure provides the means to accumulate income and capital gains for future generations, growing the family’s wealth in a tax efficient environment, whilst providing some protection from the impact of a divorce by shareholders.
Inheritance tax benefits come from three key sources:
- The first, is reducing the estate of the founders of the FIC, as they will generally make gifts of capital on the formation of the company in exchange for shares such that all the family members subscribe for different classes of shares (or a family trust does so on behalf of any minors) and these initial gifts of capital save inheritance tax completely if the donor then survives 7 years.
- The second benefit comes from the way shares are valued. If a family member has a minority interest, their shares are likely to attract a discount to reflect the size of the interest. The cumulative effect of the discounts when looking at the family as a whole can add up to a significant amount, which is not then subject to inheritance tax.
- The third is that a FIC is not within the relevant property regime so it is not subject to 10 yearly anniversary tax charges of 6% or tax exit charges like a new trust would be.
Dividends are paid out of post-tax profits to the shareholders. Corporation tax rates have been reducing and will be 17% in 2020, considerably less than trust tax at 45% on income. However, there is another layer of tax to consider when profits are distributed to shareholders and the cumulative effect of the two means that a FIC may not be a very tax efficient option if the intention is for all of the profits to be distributed annually. However, where profits are accumulated to grow the family wealth, then a FIC can start to be very tax efficient.
So in summary some general points
- In practice a FIC would generally be for investments of around £1M or more
- You can employ family members & deduct management expenses before tax
- Corporation tax is followed by income tax, so diligent use of employee and shareholder tax allowances will help to minimise the overall effect of tax
- If existing owned property is transferred or sold to a FIC there may be capital gains tax to pay, often people just pay it to get the family assets to a better place
- Shares acquired by your children can be ‘paid for’ by a loan to them
- Capital gains can be rolled up & passed into the FIC as a deferred tax item
- Consider alphabet shares so that each shareholder’s class of share has marginally different terms
- Keep each minority shareholding under 25% and consider including a couple of family trusts as shareholders
- Protection from generational inheritance tax
- Acts as a corporate veil in the event of bankruptcy or divorce of a shareholder to safeguard assets
If you would like to know more please get in touch, this is a specialist area that we refer to a trust partner.