New Wealth Planning Option: A Family Investment Company
The family investment company (FIC) model has grown in popularity for people considering tax and estate planning, and those planning how they are going to protect their wealth for their family. A FIC is a company more or less identical to any other, only created with constitutional documents, such as the Articles of Association or a Shareholders Agreement, which ensure any assets stay within the company for the benefit of the family, and any FIC shares do not pass away from the family.
If you want to pass your wealth to future generations but also want to retain control to protect it, please keep reading as I go on to discuss why a FIC is an increasingly attractive option for you to consider.
Why should I use a FIC?
Ownership of the FIC can be spread among family members but the control of the FIC will sit with the board of directors – this gives you the flexibility to retain control of the day to day management of the FIC by being on the board of directors, whilst the shares can be held by a number of family members (and you too, if you want to retain some income and/or capital rights).
A FIC can be funded by a gift (or the shares an existing investment company can be gifted to your family) which is a potentially exempt transfer, thus potentially reducing the amount of inheritance tax.
The FIC will pay corporation tax on its profits – income and gains. Currently, rates are low: 19% from 1 April 2017 to 31 March 2020 and then it is set to fall to 17% from 1 April 2020. An indexation allowance can also be claimed for capital gains.
How does it work?
The Articles of Association (a company’s rule book) of the FIC will make it clear from the outset that shares can only be transferred to a specific class of people – i.e. between the family members you know about today, plus any others that may come along in the future.
A loan of cash or a gift (usually of cash, but it could be other investments) is then made to the FIC, the FIC then carries on an investment business – it might invest in property, shares or other businesses. The directors of the FIC will decide how it is run.
What if I want to retain an income from the money?
You could consider loaning funds to the FIC, rather than an outright gift (or have a mixture of a loan and a gift). A loan may help to get things started whilst also giving you some comfort of being able to demand repayment later when the FIC is more established.
Alternatively (or in addition), you could consider being a shareholder too: your class of share might only give you a right to dividends, not a right to capital. The other shareholders of the FIC might have rights to dividends too, or they might not – it depends on whether your family members are to receive an income from the FIC, or if it is purely an investment for them to have a capital sum later.
The rights attached to each class of shares may be different – do you want all of the shareholders to have rights to vote? Should they have rights to equal amounts of income (or no rights to income)? Should they all have an equal right to capital? All of these decisions need to be made at the outset before the FIC is formed and then bespoke Articles of Association will need to be prepared to document those decisions.
Do I need a Shareholders’ Agreement?
In addition to the FIC’s Articles of Association (which are filed at Companies House and accessible to the public), it might be advisable for there to be an agreement between the shareholders about how the FIC will be run. This might be particularly necessary where you are not going to be a shareholder, as ultimately the shareholders do own the FIC. The Shareholders’ Agreement could require the shareholders to vote in favour of certain things in certain circumstances, or require the shareholders to procure that the FIC does not take certain action unless you consent.
Why use a FIC rather than a trust?
Trusts were the standard way to pass family wealth down to future generations. However, a FIC offers an attractive alternative; the main advantage currently being the lower corporation tax rate. Within trusts, income is taxed at 45% and capital gains at either 20% or 28%. Most trusts established during your lifetime are also subject to potential Inheritance Tax charges every ten years and when assets are distributed. With a FIC, there is also the option of retaining shares to enable you to receive an income, whereas, if you retained an interest in assets placed in a trust, then this has an impact on the inheritance tax, income tax and capital gains tax treatment. It is important to obtain specialist advice as there are reasons to use a trust as opposed to a FIC in certain circumstances and depending on the assets you wish to gift; however, a FIC is something that should be seriously considered as an alternative to a family trust.
Whether your family business is there for the next generation, or is an investment that you will one day sell to aid future generations, you need expert advisers around you. At IBB, we take pride in understanding what our clients need to get done and what they want to achieve. If you would like to discuss the option of a family investment company further or would like general impartial advice that focuses on the positives, resolving problems and finding solutions that support the whole family, please contact either our corporate commercial or wills, trusts and probate team.
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