Family Investment companies - how do they work?

Family Investment companies – how do they work?

Although Family Investment Company’s (FIC) have been around for several years, awareness of the flexibility that such a vehicle affords has been growing in recent years. The use of such companies is particularly attractive to director-owners of family businesses who have children, enabling parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.

What is a FIC?

A FIC is a bespoke vehicle which can be used as an alternative (or in addition) to a family trust. It is a private company that invests rather than trades (the investments typically being equity portfolios or property). The shareholders are family members taking advantage of the use of Alphabet shares enabling each direct descendent family member to be allocated a different class of share.

Usually a FIC is set up with a founder share held by the individual(s) providing the capital, being either a cash loan or assets where no chargeable gain has yet to accrue. If a cash loan, the FIC uses the money to acquire assets (e.g. property), which generate a return. Such income is either re-invested within the FIC or can be used to repay the original loan tax-free.

‘Alphabet shares’ enables family members to have different levels of control over company decisions, rights to receive dividends and entitlements to the company’s capital value. In the incorporation of a FIC, the individual setting up the company could still be a Director and preferential Shareholder holding ‘A’ shares. Such a shareholder will have the right to appoint a director and vote at general meetings (and therefore hold control of the company), however, they must have no entitlement to dividends or to any return of capital. Other family members and often family trusts are then brought in as shareholders, each holding one ‘B’ share each. These ‘B’ shares have no voting or control rights but full entitlement to any dividends and/or return on capital. The shares can be held in trust if the child is a minor.

Benefits of a FIC

• should assets rather than a cash loan by transferred into the FIC, after seven years the value of the money or property transferred falls outside the transferors’ estate for IHT purposes. However, it is important that no beneficial interest in the company is held.
• there is no upper limit in the value of assets that can be placed into a FIC whereas there is a limit of £325,000 in placing capital into a Lifetime Discretionary Trust before any IHT is charged. Any value transferred into a trust above this amount is taxed at 20%.
• being a company a FIC is subject to corporation tax on the income received which (currently) is at a lower rate than income tax. Where the property is residential mortgage interest is fully reclaimable and not restricted to the basic rate tax credit as applied to personally held buy-to-let property holdings.
• the company shareholders will be liable to tax when profits are extracted. However, a FIC offers the possibility of allocating dividend payments, which could potentially be spread amongst family members tax-efficiently;
• the company’s article of association can be set up to include specific clauses that protect the shares in specified circumstances (e.g. by preventing shares from being transferred outside of the family.)

Tax trap

Transferring assets (as opposed to cash) into a FIC can have CGT consequences for the donor and/or Stamp Duty Land Tax in the case of property used to subscribe for shares in the company. As such these costs can render the use of the FIC structure prohibitive.

Partner note: Companies Act Part 17