Why trusts are giving way to Family Investment Companies

For people with significant wealth, Family Investment Companies are now a more fashionable way of planning for the future.

Trusts have for many years been an option when looking at tax-efficient ways of planning for the future and helping children and grandchildren. Recent changes, however, have limited what you’re able to put into trust – in most cases to £325,000 in a seven-year period. This is one of the reasons we’re seeing more and more interest in Family Investment Companies (FICs) today, despite the fact that the concept has actually been around for many years.

To start with, just think of a FIC as a company, into which you can build different shares, rights and restrictions. It doesn’t have to trade. It can just hold different assets as an investment and it might be possible to transfer an existing portfolio of investments into your FIC, depending on whether this creates any tax charges.

So why bother? Well, assets can grow and income then becomes taxable within the company at 20% rather than at the higher rate of income tax. With certain investments – dividends from most other companies, for instance – no tax is payable at all within the FIC. You can choose then whether you want to take some income from the FIC, which shares dividends are declared upon, or perhaps you simply “draw down” some of the loan you used to set it up.

There are, of course, some downsides. You have the costs and administration associated with setting up a limited company and, in theory, your accounts are a matter of public record, which anyone is free to inspect. It could be that in the longer term, if the company pays tax on gains and you then take that out as a dividend, that you could pay more tax overall, and obviously tax rules can change in future.

So setting up a FIC isn’t necessarily an obvious and straightforward decision. I recommend doing the due diligence beforehand, and sitting down not only with your accountant, but also a financial adviser and a lawyer. There may, for instance, be implications for your will and you do need to decide when setting the FIC up who you want to be shareholders, and what benefits you want each person to get in future. By and large, however, savings in income tax will often outweigh the potential risks, and there can be longer-term inheritance tax savings too.

Here are some frequently asked questions:

How do I fund an FIC?

If you create a large director’s loan account, the company founder should be able to withdraw funds in later years with no tax implications. You may want to partly fund by loan and partly fund by share capital.

How does the tax position compare between assets I hold myself and in an FIC?

Corporation tax is currently 20% (income tax up to 45%) and there’s no tax on UK dividends received in a FIC. There are some other benefits that companies can take advantage of, as well as the differing tax rates.

How is an FIC structured?

A lot depends on what you want to achieve – one of the great aspects of FICs is they are so flexible. You may have a founder shareholder, for example, who keeps tight control over the FIC, and then different classes of shares for each family member, allowing flexibility over dividends and future asset growth.

You could also still use a family trust – many FICs have trusts as shareholders. As noted earlier, there is a great deal of choice when setting a FIC up.