Family Investment Companies

A Family Investment Company (FIC) is a private company (limited or unlimited) that is controlled and run by its directors (usually the parents), with family members (usually children) owning the shares. All day-to-day control and investment decisions are vested in the directors. A FIC can therefore be used by the individuals who want to transfer value to family members (or other individuals) but retain some control over the assets gifted and/or the access of the recipients.

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A Family Investment Company (‘FIC’) offers:

  • A means to pass on wealth down the generations;
  • The ability to retain control whilst giving up beneficial ownership;
  • Asset protection;
  • Protection against inheritance tax (IHT)
  • Tax savings and deferral.

How do they work?

The governing Articles and provisions of a FIC can be tailored to the specific needs of the family, covering aspects such as distribution of profits, the return of capital, transfer of shares and the appointment of directors.

Usually, the parents retain control by subscribing for shares with voting rights. They can then choose to gift non-voting shares to their children or gift them cash for them to subscribe for non-voting shares. Alternatively, the parents could settle shares or cash for subscription of shares onto a trust for the benefit of their children.

Further protection may be built into the Company in relation to the children’s shares if required (e.g. pre-emption rights, enabling you both to acquire the shares from the children in the future).

Advantages

Disadvantages

  • Takes advantage of low levels of tax currently applicable to companies
  • Utilises a company structure that is simple to understand and more straightforward than a trust structure
  • Provides an environment within which your children can in the future become engaged with investment planning, enabling control and decision making to be passed gradually over a period of time
  • A vehicle that could provide a degree of family and matrimonial asset protection (legal advice will be required)
  • Dividends of up to £14,500 could be paid to any shareholder over the age of 18 tax-free, subject to their wider tax profiles
  • Reducing your taxable estate for IHT purposes, whilst retaining control over the funds.
  • Tax inefficient if all income/gains of the Company need to be paid out to the family, as there would potentially be a double layer of tax
  • The tax efficiencies are based on current law. Future changes to corporation tax or other tax legislation (e.g. on a change in Government), to which the Company would be exposed, may create inefficiencies in the future
  • Additional costs arising through formation and ongoing corporate compliance requirements (Companies House and HMRC).

 

 

 

Tax benefits

In addition to being able to pass down wealth without an immediate inheritance tax charge, FICs can be efficient tax vehicles that bring income within the corporation tax regime instead of the charge to personal taxes.

A company will pay corporation tax at 19% which is generally lower than the personal income tax rates (the top rate being 45%). In addition, no corporation tax will be payable on a majority of dividends received by a company and most management and business expenses will be deductible for corporation tax purposes. Such expenses are not tax relievable for individuals.

FICs are particularly efficient if profits are retained in the structure for reinvestment. There will be additional tax if profits are extracted from the company.

 

 

  • Directors retain control with votes
  • Fund with loans &/or preference shares
  • Access to dividend income
  • Potential to redeem loans if required
  • Dividends tax-free
  • Profits & gains at 19%
  • Deductibility of finance costs
  • Investments & assets
  • Entitlement to dividends
  • Separate share classes
  • Future growth above a ‘hurdle’ amount

 

 

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