The concept of the family investment company (FIC) is more in vogue in recent years. We have been assisting a number of clients with such structures, to engineer sensible capital and income tax planning strategies. We are often asked about these vehicles and the benefits (and pitfalls) that might apply.

A FIC is normally a private limited company, which invests and manages assets primarily for families and future generations. FIC’s can be utilised as vehicles for controlling family wealth, and to facilitate asset growth outside of the original founder’s estate.

For any taxpayer wishing to avoid inheritance tax, a straightforward strategy is to gift capital to his/ her heirs and successors. The usual seven year rule applies, following which the gift falls completely outside the donor’s estate. An alternative might be to utilise a trust, albeit this may incur an immediate 20% lifetime charge to inheritance tax. Trusts can often be seen as complex structures which come with significant annual costs, and ongoing ten-year anniversary tax charges in addition to any lifetime charges on asset contribution and exit charges on capital distributions.

By contrast, a FIC is simply a limited company, into which the donor/ founder can contribute capital to be utilised for investment. If the majority of the shareholders are other family members, then any growth in asset value accrues primarily to them. In addition, dividends can be paid to these other family members without fear of attack under the “settlements” legislation.

Conventionally, the founder will contribute capital by way of “loan” to the FIC, and will then draw down that loan in lieu of living expenses over the longer term, thereby reducing the value of the loan over the longer term. However, he/ she may decide not to draw down the loan, and to simply leave it outstanding to the company, its value being eroded by inflation.

The founder will have a significant role in deciding which family members benefit from income generated and when.

The benefits of an FIC can be summarised:-

• Taxation – No capital gains or inheritance tax upon founding of the FIC when funded by founder loans
• Asset protection – Future growth in the asset value will accrue to the shareholders generally, of which the founder may be a minority or nil interest.
• Flexibility – The structure can be varied for additional members, and can incorporate different classes of share facilitating different dividend levels and even different variation of particular rights regarding voting, etc.
• Asset protection – The FIC’s articles together with any shareholder agreement might prevent shareholders from transferring shares to other persons such as spouses, and could also deal with what should happen to these shares should a shareholder pass away.

Disadvantages of a FIC:-

• Incorporation cost – For incorporating the FIC and preparing relevant documents such as shareholder agreements, and there will of course be a cost-plus requirement for annual accounts and corporation tax return etc.
• Public disclosure – Private limited companies, have to publish year end accounts. However, as small or even micro companies, the amount of information a FIC files at Companies House may be relatively minimal.
• Double taxation – Corporation tax will be due on income generated by the FIC at 25%.This is likely to contrast favourably with the founder’s income tax rate which could be as high as 45%. It would only be if dividends are paid out that there is then another layer of tax, albeit this could also be at a relatively low level (possibly 8.75%) for basic rate taxpayers.

Our experience with these structures indicates they work best as part of a bespoke and balanced portfolio of planning. Where any taxpayer has a clear surplus of capital, a FIC can be utilised to “freeze” such capital, giving the donor the ability to still control it, and to also utilise income generated either to roll up at a lower rate of tax, or to be distributed to family members in a low rate and controlled fashion.

If you believe a FIC might benefit you, please contact your liaison partner or one of our tax team.

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