Family Investment Companies
Traditionally, the most common way to pass down family wealth has been by way of discretionary trust structures. However, recent changes to the tax regime now mean that family investment companies (FICs) could offer more favourable tax treatments when deciding how to deal with future generations – particularly for individuals with large inheritance tax (IHT) estates.
What are FICs?
A FIC does not have a recognised legal status in itself but will generally be a private company (normally a limited company but an unlimited company will, in some circumstances, be more suitable). The founder will subscribe for shares in this company and some of these shares will be gifted to family members or, in some cases, trustees of family trusts. The gifts of shares to family members will be PETs (potentially exempt transfers), so would be outside the founder’s estate for inheritance tax purposes after seven years. If shares are transferred to trustees, the transfers would be CLTs (chargeable lifetime transfers). Following changes to the tax regime brought about by the Finance Act 2006, most new trusts now result in immediate charges to IHT, 10-yearly IHT anniversary charges and further charges to IHT if assets ‘exit’ the trust (in all cases, subject to caps).
Why are FICs beneficial?
The FIC will adopt bespoke articles of association, which could provide for, for example, different share classes and transfer provisions on, for instance, the death of shareholders or any of them ceasing to be members of the founder’s family. They may also prescribe rights to the shares which ensure that the founder maintains control of the FIC with, for example, enhanced voting, dividend and director appointment rights. Once the share structure and constitution of the FIC are established, the FIC will then hold, for example, shares in other companies, cash, property and other assets. The FIC will generally be funded either by subscriptions for shares or by loans made by the founder (which can then be repaid or drawn out of company profits).
The FIC will pay corporation tax on its income and capital gains. The rate of corporation tax is currently 19% (due to fall to 17% in April 2020), which represents a much lower rate than the potential 38.1% to which dividend payments could be subject. Most dividends received by a FIC are also exempt from corporation tax, regardless of whether the dividend comes from the UK or overseas. The FIC therefore facilitates the accumulation of income and capital gains over time, which allows for succession planning within a tax-efficient structure. Establishing the FIC with different share classes may also enable dividends to be declared in accordance with the needs of the different family members (for example, to be used for an adult child’s higher education fees). Implementing a FIC will not generally trigger any immediate tax charges (so, unlike with the discretionary trust route, unlimited amounts can be transferred to a FIC without paying an entry charge to IHT) and could therefore represent a more tax-efficient structure – particularly if long-term growth and value is favored over short-term gain.
How can we help?
We would always recommend seeking professional accounting and taxation advise before deciding to put a FIC structure in place but, if you do decide that a FIC would be right for you, we can assist in all stages of its implementation, from incorporating the FIC entity, drafting its constitutional documents, and dealing with the transfers of shares both to it (in other companies) and in it (to family members or trusts).