Recently, we have received an increasing number of enquiries from higher net worth clients exploring the use of Family Investment Companies (FICs), as a family wealth planning structure. In this article, we explore what FICs are and why they should be considered alongside other wealth protection and transfer strategies such as Trusts.
So what is a FIC?
Normally, a FIC is a UK registered private company, set up by a founder (usually parents or grandparents). It is often used as a structure to allow wealth to be shared within a family and can allow management and control to sit with certain members of the family, while the benefits of ownership sit with others. It is often considered as an alternative to outright gifts or the use of trusts and existing shares can be transferred in to hold as investments, or purchased using funds provided by the founders. It may also be that funds within an existing company are used for investment. Essentially a FIC will be an investment company, not a trading one, used to give greater control over wealth transferred and to be accrued.
What is the structure?
There is no set structure for a FIC and often factors such as the source of funds to be held for investment and the age and stage of potential shareholders will impact on the structure used.
One potential structure would involve the founders acting as the directors and holding shares with voting rights but which have no, or limited rights to dividends – let's call them the A shares. The children each get B, C, D etc. shares which have no votes but can share in dividends and capital returns. This would allow the founders to exercise control over the operation of the company while their children take the economic benefits of holding funders. In certain circumstances, growth shares can also be used in a FIC such that the increase in value over their "base" value accrues to the children.
An alternative could involve a simple capital structure for the company using only one class of ordinary shares but with those being placed in a trust. In that case the founders would act as trustees and would exercise control in that manner. Such a structure is more common where the initial funding of the FIC is by way of loan.
What is the tax treatment?
The initial funding of the FIC will depend on the particular circumstances of the family and the structure adopted, but it is usually possible to fund the FIC will no (or little) initial tax cost.
Income and gains of the FIC are subject to corporation tax, but an important factor is that under UK corporation tax rules, dividends received by the FIC should be exempt from corporation tax. This can allow tax efficient reinvestment of income within the FIC.
Dividends paid by the FIC will be taxable at current dividend rates – subject to the personal tax circumstances of the holder. If funded by a Founder Loan, repayment of the loan would be free of tax (but any interest charged on the loan may be taxable).
The extraction of capital from a FIC can present issues, in particular if any capital withdrawals cannot be undertaken as loan repayments. If that is the case, ad hoc capital withdrawals may need to be undertaken as dividends (with the resulting income tax consequences). Alternatively, a full disposal of the company shares (by sale or, more likely, liquidation) can allow extraction of capital subject to capital gains tax (CGT). As an investment company, CGT will be charged on disposal or liquidation of the FIC at the main CGT rate.
Are there other benefits?
If FIC shares are held by one spouse in a marriage or one civil partner, then transfer restrictions can be inserted in the Articles of Association to retain shares within the bloodline, which may be important (however, their value may still be taken into account in divorce when drawing up the matrimonial "balance sheet") and so they do not provide total protection from claims on divorce. We can advise on the best approach according to your wishes.
As and when children mature, a decision can be taken on whether to allow the children the power to vote on matters and so allow overall control to pass down the generations.
What else is required?
In the first instance, a full discussion about whether a FIC could be suitable for your and your family's needs should take place – coupled with a review of any existing provisions including wills and testamentary trusts on death.
Subject to that, the FIC can be set up fairly quickly, but it will need articles of association reflecting the reclassification of shares and restrictions on voting and transfer. These will be publicly filed at Companies House as will the parties' shareholdings and annual accounts. Linked documents such as trusts and loan agreements may also be required.
Note: Tax treatment and tax rates are subject to change. Always take specific advice before undertaking any tax mitigation or planning strategies.
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.
