Family Investment Companies

A Family Investment Company (FIC) is a privately owned company that holds and manages family assets while providing tax-efficient wealth transfer between generations. FICs have become increasingly popular as alternatives to traditional trusts for estate planning.

Structure & Benefits

FICs offer flexible structures that can be tailored to meet specific family objectives.

Basic Structure

A FIC is a private limited company established under UK company law
Family members typically own shares in the company
Assets (investments, property, cash) are transferred into the company
The company is controlled by directors, usually senior family members
Income and capital growth accrue within the corporate structure

Key Benefits

Tax-efficient wealth transfer: Assets can be transferred without immediate inheritance tax implications
Retained control: Parents/grandparents can remain directors with decision-making power while transferring economic value
Asset protection: Company structure provides protection against relationship breakdowns and creditors
Succession planning: Clear framework for intergenerational wealth transfer
Privacy: Less public information required compared to trusts
Corporate governance: Formal framework for managing family wealth
Lower tax rates: Corporation tax (currently 25%) generally lower than higher-rate income tax

Compared to Trusts

No immediate inheritance tax charge (unlike discretionary trusts)
No 10-year anniversary charges or exit charges
Not subject to the trust tax regime
More control over income flows and capital distributions
Often more tax-efficient for larger estates

Share Classes and their Use

FICs can implement sophisticated share structures to achieve specific family objectives.

Common Share Classes

Ordinary shares: Standard shares with voting rights, dividend rights, and capital rights
Voting shares: Carry enhanced voting rights but limited economic rights
Income shares: Entitled to dividends but with limited or no capital growth rights
Capital shares: Entitled to capital growth but limited or no dividend rights
Growth shares: Only participate in growth above a predetermined threshold
Alphabet shares: Different classes (A, B, C, etc.) with differing rights for different family members

Strategic Use of Share Classes

Control separation: Parents can retain control through voting shares while gifting economic value
Income planning: Income shares can direct dividends to lower-tax family members
Wealth transfer: Growth shares can transfer future appreciation to the next generation
Flexibility: Different classes allow tailored benefits for family members with different needs
Succession phases: Structure can evolve as family circumstances change

Example Structure

Parents: Hold Class A shares with voting rights and some economic rights
Children: Hold Class B shares with income and capital rights but limited voting rights
Grandchildren: Hold Class C growth shares that only benefit from future appreciation
Family charity: Holds Class D income shares for philanthropic purposes

Tax Considerations

FICs offer multiple tax advantages but require careful planning to maximize benefits.

Corporation Tax

Corporate profits taxed at 25% (for profits over £250,000)
Small profits rate of 19% (for profits under £50,000)
Marginal relief for profits between £50,000 and £250,000
Lower than higher-rate (40%) and additional-rate (45%) income tax

Capital Gains Tax (CGT)

Assets transferred into a FIC may trigger CGT
Incorporation Relief may be available in some circumstances, which delays CGT till the asset is disposed of
Growth within the company is not subject to immediate personal CGT
Corporate capital gains taxed at corporation tax rates

Inheritance Tax (IHT)

Transfers of cash to a FIC are potentially exempt transfers (7-year rule applies)
Transfers of existing assets may trigger CGT but become potentially exempt transfers for IHT
Value of shares can be discounted for IHT purposes due to lack of control/marketability
Future growth within the FIC is outside the transferor’s estate immediately

Dividend Taxation

Dividends paid to shareholders taxed at individual dividend tax rates:
- 8.75% (basic rate taxpayers)
- 33.75% (higher rate taxpayers)
- 39.35% (additional rate taxpayers)
Each individual has a £1,000 dividend allowance (tax year 2023/24)

Tax Anti-Avoidance Rules

Transactions in securities rules
Transfer of assets abroad provisions
Settlements legislation (income shifting)
General Anti-Abuse Rule (GAAR)
Professional advice essential to navigate these complex provisions

Employee Benefit Trusts (EBTs) and Asset Transfer

Employee Benefit Trusts can be used alongside FICs as part of comprehensive family wealth planning.

How EBTs Work with FICs

An EBT is a discretionary trust established by a company for the benefit of its employees and their families
The FIC can establish an EBT to benefit family members who work in the family business
Assets or funds can be transferred from the FIC to the EBT

Tax Advantages

Contributions to an EBT can be tax-deductible for the company
No immediate inheritance tax charge on transfers to an EBT (unlike transfers to other trusts)
No 7-year waiting period for inheritance tax exemption
The EBT can hold shares in the FIC, creating a more flexible ownership structure

Legitimate Uses of EBTs with FICs

Succession planning: EBTs can hold shares for future family employees
Employee incentivization: Can provide performance-related benefits to family members working in the business
Retirement planning: Can provide retirement benefits to family director/employees
Share ownership: Can facilitate controlled transfer of ownership to the next generation

Key Considerations

Family members must be genuine employees or directors of the FIC
Commercial rationale must exist for the EBT
Arrangements must not be tax avoidance schemes
HMRC scrutinizes EBT arrangements closely
Proper documentation and governance are essential

Anti-Avoidance Rules

Disguised remuneration rules apply to EBTs
HMRC may challenge arrangements that appear artificial
Recent tax cases have narrowed the scope of acceptable EBT planning
Professional advice is crucial before implementing an EBT strategy

Setting Up an FIC

The process of establishing a FIC requires careful planning and professional assistance.

Initial Steps

Define objectives: Clarify family goals and priorities (e.g., wealth preservation, succession planning)
Select shareholders: Determine initial ownership structure and share classes
Choose directors: Typically senior family members who will control operations
Create governing documents: Articles of association and shareholders’ agreement

Legal Requirements

Company incorporation: Register with Companies House
Articles of Association: Define share classes and company rules
Shareholders’ Agreement: Establish rights and responsibilities of shareholders
Banking arrangements: Open company bank accounts
Tax registrations: Register for corporation tax, PAYE if applicable

Funding the FIC

Cash investments: Simple transfers from family members
Assets in-kind: Transfer of existing investments or property (may trigger CGT)
Loan arrangements: Family members can loan money to the FIC
Debt/equity structure: Optimize balance between loans and share capital

Ongoing Management

Regular board meetings with proper minutes
Investment strategy reviews
Dividend policy decisions
Tax compliance and filing obligations
Succession planning updates

Family Governance

Family constitution: Document outlining values, vision, and decision-making processes
Family council: Forum for family discussion and communication
Entry and exit provisions: Rules for new family members and those wishing to exit
Dispute resolution mechanisms: Procedures for resolving conflicts
Education program: Preparing the next generation for future responsibilities

Family Inheritance Planning Trusts