5 Benefits of Family Investment Companies

In recent years, “Family Investment Companies” (FICs) have become more widely used in family tax planning exercises. However, they are not a new structure by any means – in fact our oldest FIC client is over 100 years old!

FICs are set up and operate similarly to any other company, but own assets made up of investments (e.g. stocks and shares or property) rather than trading assets, and generate investment income as opposed to deriving income from trading activities.

HOW IS A FIC FUNDED?

There are numerous ways to fund a FIC – They can be funded through a subscription for share capital or funded through a loan (or a combination thereof). They can also be funded through the sale or gift of assets to the FIC, although this may result in tax charges for the transferor.

The benefits of FAMILY INVESTMENT COMPANIES

1. There can be significant Inheritance tax (IHT) benefits to setting up a FIC. Following the changes introduced in 2006, an individual is limited to the amount that can be put into a Trust without incurring an up-front IHT charge. There are usually no up-front IHT charges for the founder of a FIC, provided it is structured correctly.
2. The value of any personally held shares in a FIC will remain in your estate for IHT purposes, however, with careful structuring, it is possible to include other family members or Trusts as shareholders. Attributing further growth to these other shareholders should serve to reduce or even eliminate further growth in the value of the founder’s estate.
3. In addition, if the funds are introduced to the FIC as loans, the capital element of these loans can be withdrawn or repaid to you at any time tax-free, or gifted to the next generation, for them to also withdraw the capital income tax-free as s part of your overall IHT strategy.
4. The income and gains of an FIC are taxable at the Corporation Tax rate, which is currently up to 25% for these companies, compared with the personal tax rates of up to 45% (48% in Scotland). Moreover, it is worth noting that, unlike the position of individuals, dividend income is generally exempt from taxation within an FIC, albeit with a few exceptions.
5. Unlike individuals, FICs can deduct most costs associated with running the company and investments therein, when calculating its tax liability. This includes investment management charges and other professional fees and can also include directors’ remuneration such as pension contributions or the acquisition of company cars (electric cars can be particularly tax-efficient). By paying less tax, an FIC may therefore have more net income available to reinvest, meaning that the overall value of the FIC may grow faster than a similar portfolio of investments held by an individual.

THE DOWNSIDES TO SETTING UP A FIC

FICs should not be viewed as an off-the-shelf option, they are a bespoke structure that should be designed to suit the specific needs of your family. As such, there are both one-off set-up costs and annual compliance costs associated with FICs, but as mentioned above, the annual costs are usually tax deductible and can be quickly recovered from the tax efficiencies achieved by this structure.

There can be a Capital Gains Tax (CGT) liability personally if existing personal investments are transferred into an FIC. This is because they are deemed to have been sold to the FIC at current market value. This would not be the case with a transfer of cash or other non-chargeable assets.

Once a FIC is set up, taxable gains can arise on unrealised profits for certain types of investment such as fixed interest holdings or bonds. However, most financial advisers are now familiar with FICs and can structure a portfolio with this in mind.

Where funds are distributed in excess of any loan repayments, there will be in theory a ‘double tax’ charge. This is because the FIC will have paid corporation tax on its profits and then any income for the individual will then be subject to income tax. That said, as FICs are created as a long-term structure, any distributions can be managed tax efficiently, for example: pension contributions from the FIC, benefits such as company cars, a salary up to the national insurance threshold, and dividends.

HOW WE CAN HELP

As discussed above, we have been setting up and acting for multi-generational FICs for many years. This puts us in a strong position to support you through the process of establishing and managing your own FIC. Our experience also means you can be confident that we will be able to advise you best on the correct structure for you.

If you are interested in understanding how a FIC could be beneficial for your circumstances, please do not hesitate to contact Tom Andrew, Gunhild Dam or your usual AAB Private Client team contact.