Family Investment Companies
Family Investment Companies (FIC) are becoming an increasingly popular method of preserving wealth in a tax efficient manner as a part of inheritance and succession planning as an alternative to the more traditional trust arrangement.
In addition the use of an FIC can also offer increased protection from divorce proceedings and creditors.
The structure of a FIC
Whilst the phrase FIC is used a lot, there is no formally recognised structure for this entity. At its simplest, this is a company, owned essentially by family members which holds investments.
In terms of establishing an FIC then, typically, the asset holders, who are usually the senior family members, incorporate a company. This can be a limited or unlimited liability company. The share capital of the company is split into different classes of shares, it may be as simple as A shares and B shares or there may be a lot of different classes depending on the level complexity required. These “alphabet shares” will be designed in such a way to separate out the control of the FIC from the economic value of the FIC.
In a typical scenario, the A shares will have the right to appoint one director and vote but have no economic rights. Usually the A shares are held by the parents wishing to pass assets to their children and retain full control of the FIC (including what dividends to pay to holders the B shares) but cannot realise any value by way of dividends or capital.
Conversely, the B shares would have economic rights but do not have the right to appoint a director or vote. The B shares have no control over the decision making of the FIC (and thus the assets of the FIC) but will benefit from any capital value and are typically held by the parent’s children.
The FIC is typically funded by way of loan from the holders of the A shares which can either be repaid from the profits of the FIC or that profit can be reinvested. This loan can be secured or unsecured.
Tax considerations of the FIC
| Feature | Benefit | Risk |
| Inheritance tax | Shares in the FIC can be gifted to family members which after 7 years will fall outside of the founder’s estate | If the founder dies within 7 years the gifted shares may be liable to inheritance tax |
| Income and gains | Income and gains of the FIC are taxed at the corporation tax rate which is lower than the income tax rate for trusts and individuals | Income and gains of the FIC are subject to corporation tax. There is a risk of double taxation where profits are distributed to the B shareholders by way of dividend |
| Dividend income received the FIC | There is no tax payable on UK, and most off shore, dividend income received by the FIC | |
| Capital gains | FICs can benefit from indexation allowance | If capital assets are transferred to the FIC there may be a capital gain tax charge on the transfer but some reliefs may be available |
| Inheritance tax on trusts | If the correct structure is used, FICs are not subject to entry charges nor the 10-year charge that a trust will be subject to |
What’s involved in setting up a FIC
Through the use of a tailored Articles of Association and a Shareholders’ Agreement, the FIC can be formed, and managed, to meet the family’s needs. The use of alphabet shares enables the founder to include different classes of individuals who each have differing rights in respect of economic value.
Provisions can be included to restrict the transfer of shares, alter the income and capital entitlements of different classes of shares, restrict the powers of the FIC (for example to only invest in real property) and/or events which trigger a compulsory transfer of shares (for example bankruptcy, divorce or a death of a shareholder).
As a company, the FIC is subject to more disclosure than a private trust. However, if privacy is required then the FIC can be an unlimited company which means annual accounts do not need to be filed. However, this may not be sufficient for all FICs and much will depend on its proposed activities.
How can Sintons help?
With over 220 years of experience in advising businesses and investors, Sintons has one of the most capable and highly respected corporate and commercial teams in the North of England. The team have set up a number of bespoke Family Investment Companies recently as a tax efficient part of inheritance and succession planning.
To discuss the creation of Family Investment Company, please contact Christopher Welch on 0191 226 7831 or christopher.welch@sintons.co.uk.
