Should you set up a family investment company to protect your family wealth?

BLOG7th Oct 2020

There is no ‘one size fits all’ approach when it comes to protecting family wealth, passing this to future generations in an appropriate way, and at the ‘right time’. Setting up a Family Investment Company (“FIC”) is increasingly a popular choice for successful family business owners as part of their broader succession and tax planning strategy. Planning with trusts has a significant role in protecting family wealth for future generations, however with limitations placed on the value which can be settled into trust this typically forms only part of a plan in which FICs increasingly feature.  

What is a FIC?

A FIC is a limited company like any other, but one which has been set up to manage and hold investments for the medium-to-long term benefit of future generations. They are typically funded by the founder transferring cash or assets by way of a loan, which are then invested by the FIC. On creation, family members and often family trusts are brought in as shareholders.

The investments are usually equity portfolios or property. The founder shareholder generally maintains control over the investments and the payment of dividends, and invites other family members onto the board as appropriate. The Articles and Shareholders Agreement are drafted to protect the shares from sale outside of the family, making this type of structure more effective in a divorce or dispute.  

How tax efficient is a FIC?

Profits and gains of a FIC are charged at corporation tax rates which are significantly lower than the equivalent income and capital gains rates charged on individuals . In addition, dividends received by the FIC may suffer no UK tax at all. The FIC is therefore very tax efficient where profits are being reinvested and the return on the investment can be significantly increased as compared to personal ownership.

Rental profits also enjoy preferential treatment since companies can fully deduct loan interest against profits whereas this is now restricted for individuals liable to income tax at higher rates. The FIC shelters the investments from income tax until the company pays dividends and the savings can therefore be considerable.  

Advantages and risks of a FIC

One of the main advantages of FICs are the Inheritance Tax (“IHT”) benefits. Once the FIC is set up, the increase in value is not part of the founder’s taxable estate. The initial capital can also be given away which (if survived by 7 years) reduces the founder’s exposure to IHT. 

As with any tax planning there are risks as tax rates and rules change. HMRC are also known to be reviewing IHT generally, potentially looking to impose lifetime tax charges on all gifts, which could include those within a FIC. Anyone considering this form of planning should therefore do so soon. 

The FIC structure is appropriate where the capital and income can be retained within the company for long periods, or indeed used as a structure to pass on to the next generation in the same way one would use a trust. What matters is establishing whether a FIC is appropriate for you and that it has been considered as part of your broader family wealth planning.  

For more information on family investment companies, please contact Derek Mitchell, Head of Business Advisory Services at AAB