Maximising Wealth For Future Generations – The Benefits Of A Family Investment Company

What is a Family Investment Company?

A family investment company (FIC) is a company which has been formed (or repurposed) to:

• Hold investments for a single family; and
• Transfer wealth from the founding generation to subsequent generations in a controlled and tax efficient manner.

The key features of a FIC are:

• Control – Initially, the FIC will generally be controlled by the founding person(s) (usually the parent(s)). This may be achieved by giving the parent(s) enhanced voting rights which give them the right to outvote the other shareholders. The founding members will generally also control the board and day to day decision making on behalf of the company. When the founding generation die, or elect to transfer control, control of the FIC will pass to the next generation.

• Share classes – FICs usually have several different classes of shares, to allow for different levels of dividends to be paid to family members. Sometimes shares will have different capital rights to allow for capital growth in the underlying assets to flow to the next generation ("growth shares").

• Restrictions on membership – Only members of the family (and perhaps only blood relatives of the founding members) will be allowed to hold shares in the FIC. This aims to avoid shares becoming dispersed in the event of death or divorce.

• Activities – Most FICs are non-trading. Instead, they exist to hold and manage investments on behalf of the family.

Why would you use a Family Investment Company rather than a trust?

Both FICs and trusts are useful methods of tax planning and managing wealth. They are often used in tandem to achieve the best results for future generations. The specific advantages of an FIC over a trust are that:

• A trust is limited to £325,000;
• Trusts carry continuing inheritance tax implications, such as exit and anniversary charges;
• Trusts come with a high administrative burden;
• The settlor of a trust is (usually) excluded from benefiting from trust assets; and
• When dealing with dividends, in particular, FICs are more tax efficient because companies do not have to pay tax on dividend income. For example, an FIC would retain all of a £10,000 dividend with no tax to pay, whereas a trust would have to pay 40% tax and so would be left with only £6,000.

FICs are generally best suited to those with a substantial amount of wealth (usually £1 million plus) to which they do not require access in their lifetimes.

Funding a Family Investment Company

The founding generation will generally fund the FIC with assets such as cash, property or investments. The controlling members then manage the assets to produce income and capital growth for the benefit of the FIC's shareholders and future generations.

• One of the most tax-efficient and flexible ways of funding an FIC is by loaning cash to the FIC. The FIC can then repay the loan (with no tax consequences) as an alternative to paying dividends (which would be taxable). Eventually, the loan could be transferred to the next generation to allow funds to be extracted by repayment rather than dividend.
• If the FIC does not pay market value for the assets (for example, where the assets are gifted to the FIC), the value of the asset transferred may be subject to inheritance tax if the transferor dies within seven years.

Taxation of Family Investment Companies

A FIC is taxed in the same way as any limited company. It pays corporation tax on its chargeable income and gains at between 19% and 25% depending on its profits. Companies with profits of £50,000 or less will pay tax at 19%. Companies with profits greater than £50,000 up to just under £250,000 will pay tax at a tapered rate between 19% and 25% and companies with profits of £250,000 or above will pay the full 25% rate.

If a company's accounting period is shorter than 12 months these limits are proportionately reduced. Similarly, the limits are reduced proportionately by the number of "associated companies" under the "control" of a company or the same shareholders.

• Companies are "associated companies" if one company has control of the other, or both companies are under the control of the same person or persons.
• "Control" is defined to include control over the affairs of the company, or over voting power, or share capital or issued share capital, or over the income or assets of the company. If two or more persons together satisfy any of the above, they have control of the company. In determining whether any person has control, the rights and powers of certain other persons may be attributed to them. There are some exceptions, for example an associated company that has not carried on any business during the accounting period is disregarded.

A close investment holding company is not entitled to claim the lower or marginal rate of corporation tax, so must pay the full 25% irrespective of the level of its profits. The same applies to a non-UK resident company.

A close investment holding company in basic terms is a close company (controlled by 5 or fewer shareholders or directors) that does not exist wholly or mainly for trading, property letting or holding a trading company.

Disadvantages of FICs

When deciding whether to use an FIC it is important to consider the potential disadvantages to the structure, which can include the following:

• Transferring assets into an FIC can be expensive and complicated. For example, a transfer of property will result in stamp duty land tax and capital gains tax charges;
• The cost of setting up a FIC is generally higher than the cost of setting up a trust; and
• There is a potential for double taxation, as corporation tax will be payable on gains within the FIC and then income tax will be payable on dividend income from the FIC.

Conclusion

In summary, a family investment company offers a strategic way to manage wealth, ensure tax efficiency and preserve family assets for future generations. To explore how a FIC can benefit you family's financial future get in touch with Ingrid McCleave.