What are Family Investment Companies and how can you use them?

In the ever-evolving landscape of wealth management, new methods are required to help families grow and protect their assets across generations.

In 2006, watershed changes meant that lifetime transfers into trust now incur an Inheritance Tax (IHT) charge of 20% on any value above £325,000.  Ever since, Family Investment Companies (FICs) have been growing in popularity as a tool for intergenerational wealth transfer.

What is a FIC and how does it work?

A FIC is a private company typically used to hold, manage, and pass down family wealth.  It can be Limited, or Unlimited (with the latter requiring far less Companies House disclosure, but providing less liability protection). It has articles of association and is controlled by directors. It allows family members to place assets, such as investments or property, within a company structure.

The shareholders would normally be different family members, with the directors usually being the founders initially, though this changes over time.

The role of a FIC in succession planning

A FIC can accumulate wealth over time, with the directors having full control over when payments are made to shareholders or loan holders.  This can be by way of loan repayments, or income payments in the form of dividend payments, interest payments or a salary to employees and directors.

FICs therefore offer flexibility in ownership, voting and dividend rights, allowing families to structure them according to their specific needs and goals.

What are the inheritance tax implications of a FIC

Shares and loans are held by individual members of the family, or by family trusts.  Individuals may be subject to IHT on their deaths on the value of their shares and loans.  Trustees are subject to a different IHT regime involving 10 year charges and exit charges on transfer out of trust.

When family members gift FIC shares or loans to younger generations, this can qualify as a Potentially Exempt Transfer. Provided the donor survives for seven years after the gift, the value will fall outside of their estate for IHT purposes.

If the gifted shares increase in value, this growth benefits future generations without being subject to IHT on the donor’s death. FICs allow specific "growth shares" to maximize this advantage, reducing IHT for high-growth investments.

Older generations would usually retain some shares in the FIC, often those with voting rights, allowing them to control the FIC and continue to receive income if needed.

Tax treatment of a FIC

Tax on income

A FIC is subject to corporation tax on its income, at the rate of 25% (the lower rate of 19% is not available for most investment companies).  This remains considerably lower than the higher income tax rate (currently 45%). Most dividends received are taxable at 0% and so portfolios can be positioned accordingly, subject to commercial considerations.  Retained profits within the FIC allow for more efficient reinvestment, amplifying the long-term compounding effect and making FICs suitable for those looking to preserve and grow wealth within the company over time.

Tax on gains

Any gains on assets within the FIC will be subject to corporation tax rather than CGT.  Transferring non-cash assets into a FIC can trigger an initial CGT charge at the point of set up, together with SDLT in the case of property assets.

If the FIC holds shares in a trading business, it may be possible to sell the business without an immediate tax liability for the FIC. This is an added advantage for those looking to sell a family business, though extracting funds from the FIC post-sale should be strategically planned.

Withdrawing funds

Loans made to the FIC can normally be drawn down tax-free. Where interest is charged, this would normally be subject to income tax for the individual loan holder.  A salary can be paid to any family members providing services to the business. When dividends are distributed from the FIC to family members, they are subject to income tax beyond the £500 tax-free allowance.

Are FICs right for me?

In our experience, people tend to see the most benefit from a FIC if they are:

• Business owners; and/or
• Hold cash (from either selling their business or an inheritance), to deploy into a wealth structure

However, FICs can hold any asset type and so can be considered in a variety of situations. As part of a review of succession plans, careful consideration of a FIC should be undertaken.

How we can help

If you would like to discuss your own situation or that of a client, and whether a FIC is right for the context, please get in touch with the Succession and Tax team and we would be happy to make sure you have the right plan in place.