What is family investment company and how does it work?

As a business owner, planning for your succession and the future of other family members may be a key concern. Understanding how to secure family wealth and protect your company’s future if you are looking to pass it on to the next generation is also essential.

Family Investment Companies enable parents/grandparents to retain control over assets while accumulating wealth tax-efficiently. They are a valuable tool for tax-efficient family wealth planning. An FIC can offer numerous tax benefits to business owners.

Below, we will cover the key things you need to know about Family Investment Companies (FICs).

What is a Family Investment Company?

A Family Investment Company (FIC) is a private company controlled and run by its directors (usually the parents), with the parents and other family members owning the shares. It is a normal company incorporated and limited by shares, but it invests rather than trades. Examples of the types of investments a FIC can include are cash, equity portfolios, or property.

How do Family Investment Companies work?

A FIC can be used by parents or grandparents who want to transfer value to family members (or other individuals) but retain some control over the assets.

The FIC can be incorporated with different classes of shares. Each class should have the same rights (voting rights etc), but the different classes allow flexibility in how and to whom dividends are paid.

How is an FIC created?

A Family Investment company is set up by the founders, who then transfer cash or assets, usually through a loan or incorporation reliefs, into the FIC.

Before setting up an FIC, you need to consider when transferring assets, and whether this has tax consequences for Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT).

The founder shareholder normally maintains control over the investments (or appoints an adviser to help to control it on their behalf). The founder shareholder can also control the payment of dividends and return of capital. This is achieved by separating voting rights or in the Articles of Association and shareholders agreement.

When the FIC is created, family members and family trusts are included as shareholders, and different classes of shares can be issued.

What are the advantages of an FIC

There are several benefits of family investment companies including:

• The founder shareholder can continue to control the company’s assets by being named a director and preferential shareholder. This gives flexibility over how the income and capital rights are structured.

• The FIC can be funded with cash or non-cash assets, such as property and other investments owned by family members. It can provide asset protection for future generations.

• As an FIC is a company, it does not pay tax on UK dividends paid (and most non-UK dividends). This is tax efficient compared to an individual paying the maximum dividend tax rate of 38.1%.

• Profits from the investments are subject to Corporation Tax rates of 19% to 25% rather than the higher rate personal income tax rates of 45%.

• Companies are not restricted from tax relief on mortgage interest and other finance costs that individual investors are. Full tax relief for interest paid on residential mortgages is available.

• For capital gains, companies pay corporation tax of 19%-25% compared to the maximum individual capital gains tax (CGT) rate for a high-rate taxpayer of 20%. This rate increases to 28% for individuals where the gain is on a residential investment property.

• Salaries and dividends can be paid to the shareholders to use personal allowances and basic rate tax bands.

• Surplus cash could be used to pay pension contributions for the directors.

Disadvantages of an FIC

• Non-cash assets (such as property, etc.) will be deemed to be transferred at their market value, so a capital gains tax (CGT) charge may arise based on the difference between their current market value and the original cost. However, such transfers can be staged over several tax years to maximise each year’s annual CGT exemption.

• Companies do not benefit from the annual Capital Gains Tax (CGT) exemption given to individuals, which is currently £6,000.

• The shares in the FIC will not benefit from any Inheritance Tax reliefs upon death, such as business property relief (BPR), because it is an investment company, not a trading company. However, for inheritance tax purposes, shares gifted during a shareholder’s lifetime will be treated as potentially exempt transfers (PETs) and will escape an IHT charge if the donor survives seven years.

• The costs of setting up and administering corporation tax returns and accounts for the FIC can make it a more expensive option.

• An FIC may not be the correct structure if all the profits are extracted.

Before setting up an FIC, seek advice from a qualified accountant or tax advisor, such as dns accountants.

HMRC’s view on Family Investment Companies

In the past, HMRC has investigated FICs and concluded that Family Investment Companies were being used as a planning strategy for generational wealth transfer and the mitigation of Inheritance Tax.

However, the outcome of this HMRC investigation found no evidence to suggest a correlation between those who establish Family Investment Company Structures and tax non-compliance behaviour.

So, FICs remain a useful tax-efficient structure that HMRC is unlikely to challenge in the short term.

How do I set up an FIC?

Setting up a family investment company can be done with help and advice from a qualified tax professional. Founding shareholders will transfer assets into the company. However, your tax advisor will advise you if the transfer of those assets has tax implications for Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT).

The founding shareholders normally maintain control over the company and therefore, control the payment of dividend income and return of capital. This is achieved by separating the rights relating to shares within the Articles of Association and possibly a shareholders agreement.

When the FIC is created, family members and family trusts are brought in as shareholders and different classes of shares can be issued.

Use dns accountants to set up your Family Investment Company

An FIC can be complex to set up, so it’s worth seeking professional advice from people who are experienced in Family Investment Companies.

At dns accountants, our tax experts have helped our clients to set up many Family Investment Companies.

For FIC and other tax planning advice, contact us today at 033 0088 3616, email contact@dnsaccountants.co.uk or book a free consultation.

Conclusion

Family Investment Companies (FICs) can be a tax-efficient alternative to family trusts. They can enable business owners to retain control over assets while accumulating and passing on wealth in a tax-efficient manner to children or grandchildren.

For people who own companies with large cash reserves, numerous assets, or a property portfolio, an FIC may be a tax-efficient and flexible way to manage their estate and wealth.

Frequently Asked Questions about Family Investment Companies

How do FICs affect inheritance tax?

FICs can form part of inheritance tax planning for business owners. They can be a tax-efficient way of passing on the shares in the FIC to other family shareholders or new family members and minimising inheritance tax. The flexibility they provide while controlling your wealth can attract business owners.

Can I put property into a family investment company?

Yes, you can. However, if property is transferred, the company will also pay stamp duty land tax (SDLT) based on its market value. If the property is residential, a 3% additional SDLT rate would be charged on top of the standard SDLT rates.

What is the difference between a trust and a family investment company?

FICs and trusts are popular structures for managing family wealth and assets in the UK.

A trust is a legal vehicle that allows you to transfer assets into it for the benefit of others. Trustees are responsible for administering the trust. An FIC is a company established to hold a family’s investments, such as shares in other companies, investment property, or share portfolios, often without the tax penalties associated with trusts.

Both trusts and FICs offer benefits and drawbacks. Seek expert tax advice before deciding which one is right for your business and family circumstances.

FICs offer tax-efficient wealth transfer and succession planning, as well as asset protection and flexibility.

Trusts offer similar benefits, including tax advantages and flexibility, but can be more complex and costly to set up and manage. Trusts may be less tax-efficient than Family Investment Companies (depending on your circumstances) as trusts can mean you’re subject to higher rates of income tax and capital gains tax, and you’re liable for inheritance tax.

Speak with an expert

Any questions? Schedule a call with one of our experts.

Book a call