Family Investment Companies (FICs) are not a new phenomenon, but they have been gaining in popularity over recent years as an effective estate planning tool, especially since changes to the taxation of trusts have made discretionary trusts a less attractive option.
What is a FIC?
A FIC is a company that can be used to pass family wealth down to younger generations in a controlled way, so that parents do not simply leave large lump sums of money to their children or other family members, with all of the risk that this entails. FICs are therefore appealing to parents who want both to benefit their children and plan for inheritance tax (IHT) without entirely handing over the reins to the family wealth.
The most common structure of a FIC is one in which the parents incorporate a company and appoint themselves as directors and shareholders. As directors/shareholders they maintain control over the running of the company and the assets which it holds. The parents can then either gift non-voting shares to their children or gift them cash for the specific purpose of subscribing for non-voting shares. Different classes of shares can be issued if desired. The children's shares carry certain rights to income and capital, but as they do not carry voting rights, control of the company ultimately remains with the parents.
It is also common for controlling shares in the company to be held by a family trust (of which the parents may appoint themselves as trustees) rather than by the parents in their personal capacity. One of the advantages of this structure is that any possible value attributed to the controlling shares falls outside of the parents' personal estate for IHT. Having a family trust as a shareholder also allows a measure of flexibility should the parents (as trustees) wish to benefit or provide for other family members, such as minor grandchildren, who are not shareholders.
What are the benefits of a FIC?
Apart from the advantages already mentioned above, FICs can be a useful IHT planning tool as they enable individuals to decrease the value of their estate without simply giving away their assets, provided they survive the gift by 7 years. Conversely, settling cash into a trust will incur an immediate tax charge of 20% if the value is above the available allowances.
Clients are also attracted by further tax advantages once assets are held by the FIC, as the company will be subject to the more appealing rate of corporation tax instead of the higher rate of tax applicable to trusts. Furthermore, dividends received by the company in respect of investments which it holds will be received free of tax, maximizing the level of income available either to reinvest or pay out to shareholders.
It's not all about tax savings though. FICs are attractive from an asset protection perspective. The FIC provides a mechanism for benefitting children or other family members whilst planning for the uncertainties that the future holds. Parents who have built up considerable wealth though many years of hard work will not want to see that wealth dissipated once it transfers to the next generation. The FIC's articles of association will be specifically tailored to cater for the family's particular needs and concerns, and other documents such as a letter of wishes or family constitution can also be useful in providing guidance and direction to those involved.
There is likely still to be a place for discretionary trusts within estate planning and protection of family wealth for some years to come. Indeed FICs are generally more suited to high value planning exercises given the initial set up and ongoing administration costs. However, there is no doubt that FICs do present an attractive planning option in many circumstances and we are likely to see even more of them in the future.
Although HMRC had set up a dedicated unit in 2019 to examine the tax-avoidance risks associated with FICs, the unit has now been wound up having found no evidence of correlation between the use of FICs and non-compliant individuals. This move will no doubt increase client confidence in the structure and further add to the structure's popularity going forward.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.