A Family Investment Company (FIC) is a valuable tool for tax-efficient family wealth planning.

For business owners and high net worth individuals looking to structure and pass on wealth to family members, make tax savings, and provide asset protection, a family investment company may be right for you. The flexibility that a family investment company offers makes it a great choice over things like traditional trusts.

In this blog, I’ll cover some of the advantages and disadvantages of a family investment company, the areas of tax efficiency they offer and what to consider when you set one up.

What is a family investment company?

A family investment company is a company established for investment purposes. An FIC is a normal company incorporated and limited by shares, but invests rather than trades.

The types of investments that can be held in a family investment company include cash, equity portfolios, and property.

Incorporating the FIC is relatively straightforward, as it is registered at Companies House, just like any other private company.

A family investment company is established by the founders, who can transfer cash or assets, typically through a loan, into the FIC or by utilising incorporation reliefs.

Tax savings can be made because profits generated in a family investment company are taxed at corporate tax rates, rather than as personal income or capital gains. For individuals who are additional-rate or higher-rate taxpayers, the savings can be of significant value.

A family investment company provides Inheritance Tax benefits, making it an alternative to more traditional trust arrangements used in the past for inheritance tax planning.

Who should consider using a Family Investment Company?

Family investment companies benefit business owners, entrepreneurs and high-net-worth individuals, who are higher or additional rate taxpayers with portfolios of property and investments. They are ideal for long-term, multi-generational tax planning purposes, enabling you to pass on wealth and assets to future generations of family members.

Advantages of a Family Investment Company

The benefits of family investment companies are as follows:

Asset protection

Assets can be protected in an FIC by shielding wealth from personal liabilities and creditors. This can be advantageous for families involved in trading businesses, as it allows them to separate investment assets from trading risks.

Succession planning

A family investment company provides a structured and controlled method for passing on wealth to future generations of family members. Founders can use shares with varying rights to retain control over company decisions while transferring assets to their children and grandchildren.

You can maintain control over the company’s assets by being named as a director and a preferential shareholder. This provides flexibility in structuring the income and capital rights.

Gifting shares to children can also help reduce inheritance tax liabilities.

Preservation and accumulation of wealth

A family investment company is an ideal way to preserve wealth for future generations. The tax advantages offered by an FIC can help to accumulate family wealth.

Corporation Tax

Profits arising within the FIC are chargeable to corporation tax instead of income tax. Corporation tax rates range from 19% to 25%, depending on the level of profit. The 25% corporation tax rate applies to companies with annual profits exceeding £250,000. For companies with annual profits below £50,000 you will pay corporation tax at the 19% ‘small profits rate’. If a company’s profits fall between the upper and lower limits, marginal relief will apply to bridge the gap between the two rates.

If you hold an equity portfolio within the family investment company, there may be no tax at all, as dividend payments are often tax-free from company to company. If this is the case, then the return on the investment will increase significantly.

For individuals with residential property portfolios, FICs can be used to house their residential property portfolios. Rental profits in the company are taxed at corporation tax rates. Companies can also deduct any mortgage interest from the rental income, which is now restricted for personal investors.

 Capital Gains Tax (CGT)

Corporation tax rates apply to any gains on assets sold within the company rather than Capital Gains Tax (CGT) rates for the individual.

CGT may be triggered on the transfer of assets into the FIC, so it may be that an FIC is not a suitable option. Seek professional advice before deciding to set up the FIC to ensure you and your family members gain maximum tax relief. Barnes Roffe can advise you on the best course of action.

Income Tax and Dividend Tax

The FIC shelters investments from income tax until the funds are extracted from the business. The shareholders will be liable for income tax when profits are extracted. Payments are typically made through dividends and will be subject to the current rates of dividend tax.

We often advise against paying dividend income to the founder shareholders, as their income levels can be high and therefore, dividends received will be taxed at higher rates. If this is the case, the combined tax rate for the corporate and the personal tax would be higher than if the asset were held directly.

For children over the age of 18 holding shares in the FIC, payment of a dividend up to the basic rate can be a very efficient way of extracting funds. This can be used to provide income during periods of further education or university. Dividends paid to minors are generally taxed on the parents.

The most significant tax benefit of an FIC is when the capital and income are retained within the company for long periods to pass wealth onto the next generation.

Inheritance tax planning

The FIC is often set up for Inheritance tax purposes. That is because most of the increase in value in the company is attributed to shares held by the next generation.

Gifting shares to children can be a potentially exempt transfer for IHT. The value of the gift is excluded from the donor’s estate for inheritance tax (IHT) purposes, provided the gift is made at least seven years before the donor’s death.

Tax relief on interest

Where the loans are used for the company’s business (for example, acquiring new shares or managing the business), a corporation tax deduction for interest on loans taken out against the value of its investments can be claimed by the company. However, loan interest deductions may be restricted if the total interest payable on a group basis exceeds £2 million per annum. This can achieve significant savings as individuals are not able to claim tax relief on interest on loans to acquire a portfolio of shares.

Disadvantages of Family Investment Companies

There can be significant tax implications when setting up the FIC, depending on your circumstances and future plans.

If property is transferred to the FIC rather than cash, there could be immediate tax consequences. The transfer of property may trigger a capital gains tax charge and a Stamp Duty Land Tax charge (including a 3% SDLT surcharge). If the property value exceeds £500,000 and is not being used for a qualifying purpose (e.g. for rental), it would typically be subject to the Annual Tax on Enveloped Dwellings (ATED), which would incur additional costs.

There are costs involved in setting up the FIC, as well as ongoing administrative expenses for filing annual accounts and corporation tax returns. These additional costs can make the FIC a more expensive option.

Some types of investments might be better held outside of an FIC. For example, investments benefiting from specific tax incentives, such as the Enterprise Investment Scheme (EIS) or Business Property Relief (BPR), may not benefit from the same advantages within a corporate structure.

If you wish to extract profits from the FIC, then it may not be the correct structure to use. Double taxation can occur because you’ll pay tax via the company in corporation tax, and individuals are subject to income tax or dividend tax on the profits extracted.  Retaining profits in the company or directing income to other family members can minimise the tax consequences.

Speak to Barnes Roffe to get an idea of tax liabilities, tax savings and costs before making a decision. Circumstances of yourself and individual family members will be important in deciding if setting up an FIC is the best route for you and your family members.

How is an FIC set up?

The FIC will need to be incorporated at Companies House. This is a relatively simple procedure.

Setting up a family investment company typically involves shareholders transferring assets into the company. You should be aware that transferring assets may have tax consequences for Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT); therefore, it is advisable to seek professional advice before taking any action.

The founding shareholders typically maintain control of the company and the payment of dividends and return of capital. This is achieved by separating the rights relating to shares within the Articles of Association and a shareholders’ agreement.

On the creation of the FIC, family members and family trusts are brought in as shareholders and different classes of shares can be issued.

Conclusion

A Family Investment Company (FIC) can be used as an alternative to a family or discretionary trust. It enables parents or grandparents to retain control over assets whilst accumulating and passing on wealth in a tax-efficient manner to the next generation. Family investment companies are a valuable tool for multi-generational succession planning.

How Barnes Roffe Can Help

Our tax experts can help you plan and decide if an FIC is a suitable structure for you. As professional advisers, we assess your circumstances and family situation to determine whether an FIC or trust may be the ideal option for you.

If you have a trading company with substantial cash reserves, have inherited significant wealth, own numerous assets, or are building or planning to build a property portfolio, then a FIC may be a tax-efficient and flexible way to manage your estate and wealth.

However, there is no one-size-fits-all solution to your estate and tax planning. We can help create a bespoke wealth planning and investment strategy for you and your family members, ensuring everything is set up and administered in a compliant and tax-efficient manner.

Contact us today for help and more information on FICs.

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