What is a Family Investment Company (FIC)?
A privately owned company which holds investments rather than doing any kind of trading business. It is called a “Family Investment Company", as usually all the shares are owned by members of a family, or Trusts set up for the benefit of that family and used to pass wealth to future generations.
What do Family Investment Companies normally hold?
There is no restriction on what FICs can invest in but they most commonly invest in stocks and shares. This is because dividend income from stocks and shares will not generally be subject to corporation tax within the FIC itself and, if this dividend income is not distributed out to the shareholders, can be reinvested thereby further increasing growth.
They can be used to hold rental properties (residential and/or commercial) but care is required, particularly in relation to transferring in any existing properties, to assess the tax implications of doing so. On occasion, FICs may also be used to make loans to other family companies (often trading companies).
Who can set up a Family Investment Company?
Anyone who would like to use a company structure as a means of holding cash or investment assets for the benefit of their family. Often they will be used by business owners who are familiar with how companies operate.
How are assets added to a Family Investment Company?
This depends on the assets and will be dependent upon tax and structuring advice in relation to the FIC and how it fits into any overall estate planning. Funding a FIC by way of cash (either by way of a share subscription or a loan) is the most straightforward. Properties or investments can be transferred to a FIC, though this will usually give rise to capital gains tax implications and stamp duty land tax in the case of properties.
How can Family Investment Company shares be structured?
Often FICs will be set up with multiple classes of shares, each designated by a different letter of the alphabet. The different classes of shares can each have different voting, income (dividend) and capital rights to suit the desired objectives.
Who should own shares in the Family Investment Company?
Where set up with multiple share classes, often individual family members will own a different class of share each. These shares can be owned personally by the different family members, or in some situations they can be held in trust for them. One advantage of using multiple classes of shares in this way is that the directors may pay different amounts of dividends to the various family members to suit their individual requirements and needs.
The people setting up the FIC will usually hold the voting shares (so that they retain control over what is invested in and (if and) when the other “family” shareholders can benefit via dividends etc), with the other family members (such as children) holding the shares with economic (income and capital) rights. Again however it is flexible and subject to the specific individual circumstances in order to suit the family’s needs and objectives.
How can Family Investment Company shares be passed down the family?
By way of lifetime gifts, or on death in accordance with the shareholder’s Will (or the intestacy rules if there is no Will in place). Shares can either be given outright to individuals or can be held on trust for their benefit.
What are the inheritance tax consequences or making gifts of FIC Shares?
If the shares have any value, they will be subject to the usual inheritance tax rules. This means that if the person giving away the shares survives the gift by more than 7 years, then there is no inheritance tax to pay. However, if they do not survive a gift by 7 years, then the gift could be subject to inheritance tax on their death, calculated on the value of the shares at the date of the gift. There is a tapering relief once 3 years have passed from the date of the gift. FIC shares left by Will form part of a deceased’s estate, and if the inheritance tax threshold is exceeded, will be subject to 40% inheritance tax on their market value.
What are the capital gains tax consequences on making gifts of FIC Shares?
Lifetime gifts of FIC Shares will be subject to capital gains tax if the shares have increased in value since they were acquired. This means that any gain will be taxed at 18% or 24% (based on the current capital gains tax rates) depending on the individual’s income tax band. Gifts on death are not subject to capital gains tax, as a person’s death washes away all capital gain. This means that the person receiving the shares (or the trustees) receive the shares at the date of death value.
What is the minimum overall value for a FIC?
There is no minimum value for setting up a FIC, though consideration should be given to the cost of setting it up as well as the annual administration costs involved in company compliance and reporting. Given the ability of a couple to put up to £650,000 into a discretionary trust or trusts FICs do not generally tend to be used if the value is below £1m, but this is not a hard and fast rule.
Can Family Investment Companies help protect against divorce?
FICs cannot be ringfenced against divorce and shares in a FIC that are held by a divorcing spouse are an asset that will be factored in the marital assets. Provision to help protect a FIC against relationship breakdown can be made in the FIC Articles, which can restrict how shares can be transferred and also give a right for other shareholders to buy back the shares if they were to end up out of the family’s hands.
Pre or post nuptial agreements should also be considered. The consequence of these provisions is that the value of the shareholding may be limited in the event of divorce, which can protect against their forming part of a divorce settlement. For more information about family businesses and divorce see our recent article.
How can Family Investment Companies help with inheritance tax planning?
FICs can be structured so that different classes of shares receive different amounts of capital on a winding up. For example, classes of shares can be set up that only receive their nominal value, whereas other classes of shares can be set up which will receive all the future increase in the value of the company. This enables the value of any initial shares that are gifted or future growth to be given away, so that after 7 years the value of any initial gift along with any future growth will not be subject to inheritance tax in the hands of the original shareholder / founder.
How are Family Investment Companies taxed on death?
Unlike trading companies, FICs are subject to inheritance tax on the full value of the shares on death. However, minority ownership discounts can apply, which take into account the minority owner’s lack of control over the company. This discount can be very useful for general family estate planning and can result in substantial inheritance tax savings.
What are the advantages of Family Investment Companies over Trusts?
There is usually no immediate tax consequence of adding large cash sums to a FIC, whereas trusts are usually limited to a person’s available nil rate band (currently up to £325k), otherwise an immediate (20%) inheritance tax may be due.
If dividend income is to be retained within a (discretionary) trust, it would be subject to income tax, and further tax when paid out of the trust. However, if this dividend income was retained within a FIC, it would not be taxed at all.
Unlike trusts, the value of assets in a FIC are not subject to 10 yearly or exit inheritance tax charges.
What are the disadvantages of Family Investment Companies over Trusts?
FICs are subject to double taxation when non-dividend profits are extracted (i.e. rental income for example would be taxed at the Corporation Tax rate — currently up to 25% and then taxed again at the dividend rate (currently 8.75%, 33.75% or 39.35%) when extracted from an FIC, whereas it would only be subject to the marginal income tax rates if paid out of a trust.
Companies, in particular limited companies, usually have higher compliance requirements than trusts, though usually both must submit tax returns.
Should I use a limited or unlimited company as a Family Investment Company?
Unlimited companies are sometimes used for FICs, as they have lower Companies House reporting requirements, enabling details to be kept out of the public domain. In addition, with investment companies that only invest in stocks and shares, the limited liability protection that limited companies provide is of little or no benefit.
What are the ongoing administrative requirements of a Family Investment Company?
FICs, like other companies, have ongoing compliance requirements. Tax returns must be submitted each year, and accounts and confirmation statements filed each year with Companies House.
If I already have a Family Investment Company in place, can I make changes to the structure?
If the shareholders are all in agreement, they can change the company Articles of Association and restructure the shares. If they are not in agreement, it will depend on whether they have enough votes to do that under the existing Articles. Any changes may also give rise to actual or deemed capital gains tax charges so specific tax advice will be required before making any changes. Any additional funds added to the FIC should also be made in the same proportions which may mean that, depending upon the particular circumstances, setting up a new, separate FIC may be more tax efficient option.
