The number of Family Investment Companies (FIC) has increased significantly over the past decade, with enhanced interest since the October budget. A valuable means of managing wealth tax-efficiently, a recent report by HMRC concluded there were no significant tax avoidance concerns surrounding their use. The report also found that the average FIC was valued at £5 million.

Offering a balance between control and tax-efficient wealth management/transfer, FICs are especially popular among high-net-worth families, property investors, and business owners. So, how are they structured, and what are the specific pros and cons?

What is a Family Investment Company?

Before we look at the details of FICs, one of the best analogies is considering an FIC similar to a family-controlled investment bank. In this scenario, all members hold shares proportionate to their interest, with a split between control of the company and entitlement to income.

Definition

An FIC is a private (predominantly) limited company designed to manage broad family wealth. While most FICs are limited companies, limiting financial liabilities beyond the company, some are set up as unlimited companies to benefit from enhanced privacy. However, there are potential financial consequences for unlimited companies.

Key components

There are several key components to an FIC, which include:-

• Shareholders: These are typically family members
• Directors: Normally parents or older generation members with experience in overseeing operations.
• Assets: Typical assets include property, cash, investments and other income-generating assets.

Many wealth management advisers now see FICs as a more tax-efficient alternative to trusts, which have seen significant changes in their tax position and longer-term liabilities.

Key benefits of family investment companies

FICs offer several key advantages, although families’ benefits will vary depending on their specific situation and income requirements.

Ownership structure

Typically, the parents or older generation hold the voting shares, and non-voting shares are allocated to children or beneficiaries. This allows the parent or older generation to retain control of the company and its operations, while non-voting shareholders can benefit from income and long-term asset appreciation.

Tax efficiency

As FICs are effectively investment companies looking to enhance assets on a long-term basis, they are liable to tax on profits/gains. However, the standard corporation tax of 25%, reduced to 19%, where companies have taxable profits less than £50,000, is significantly lower than income tax rates for high-rate taxpayers. This allows the company to retain more funds to enhance long-term returns.

Control and flexibility

The traditional ownership structure of an FIC allows several ways to control not only the decision-making process concerning business/investments but also the long-term transfer of wealth. These include:-

• Retaining voting rights to effectively separate the running of the family investment company against the receipt of income.
• Balancing family dynamics is crucial in this scenario, where younger family members could be introduced as shareholders over time.
• Protecting against risks such as divorce or bankruptcy, which could have a material effect on the company’s future.

Succession planning

In a typical scenario, when looking to set up an FIC, the parent/grandparent would subscribe to voting and non-voting shares. An investment of £1 million may be split, £200,000 into class A voting shares and £800,000 into class B non-voting shares. Once the subscription is completed, the class B shares are transferred to the family members.

Assuming the transferor lived beyond seven years after the date of transfer, these shares would fall outside of their estate on death, reducing the potential inheritance tax liability.

Potential drawbacks and risks of a family investment company

While a well-structured FIC has significant benefits, it’s essential to appreciate its drawbacks and potential risks. Establishing the structure of an FIC, which will include creating articles of association, share allocations, and different roles within the company, requires professional advice.

When you add fees associated with producing accounts, filing, and legal advice, the cost of setting up and running a family investment business can add up.

Taxation

When it comes to taxation of family investment companies, this is relatively straightforward, although ensuring they are being used for legitimate purposes is essential. As discussed above, a recent HMRC report found no evidence of family investment companies being used as tax avoidance vehicles. This is undoubtedly encouraging, although, as we have seen with some recent unexpected inheritance tax changes, it is vital to be on your guard and up-to-date with HMRC/government thinking.

Administration

As with any limited (or unlimited) company, records must be accurate and up-to-date, all compliance obligations must be fulfilled, and those assisting on the administrative side must be sufficiently qualified and experienced. Historically, some of the more common pitfalls in this area include inadequate documentation and varying elements of uncertainty regarding share allocations today and going forward.

Family investment companies and tax planning

For many families, creating and running an FIC tends to focus more on the structural benefits rather than the potential tax savings. This is where professional advice from your accountant can create numerous advantages, such as:-

Income tax planning

The issue of double taxation, tax on company profits and tax on dividends paid to shareholders is an obvious concern. As a family, allocating income across multiple shareholders with different tax liabilities can reduce the overall tax burden on income from an FIC.

Capital gains tax

While the potential capital gains tax benefits of a FIC may not be obvious, depending upon the assets, there may be slightly reduced rates for additional rate taxpayers. The main benefits come from tax deferral and retained gains, the ability to offset interest charges on residential property investment, and strategic asset transfers.

Inheritance tax

Regarding inheritance tax, the structure of FICs can minimise exposure to 40% inheritance tax. It is also a valuable vehicle for gifting shares, retaining control, reducing the overall value of your estate, and transferring wealth efficiently over generations.

The details of savings regarding income, capital gains, and inheritance tax will vary in different scenarios, highlighting the critical need to take professional advice at the outset.

Who should consider a family investment company?

While there is no one-size-fits-all approach when choosing to set up and manage an FIC, there is a reasonably well-defined target audience:-

• High-net-worth individuals with significant assets or investments
• Property investors looking to manage a portfolio efficiently
• Families planning for intergenerational wealth transfer

We know that many FICs have a strong interest in property and private equity, creating a structure with several long-term benefits.

There are many different questions you should ask yourself when considering an FIC, but some of the main ones are as follows:-

• Do you own multiple properties or investments?
• Are you concerned about inheritance tax?
• Do you want to retain control while involving the next generation?

If the answer to these three questions is yes, then it is beneficial to get advice from your accountant about the potential benefits and whether this type of structure is appropriate for your situation.

Steps to set up a family investment company

We’ve looked at the structure, the pros and cons, the tax implications and the long-term benefits. It is probably helpful to look at the basic steps when setting up an FIC:-

• Step One – Define objectives, usually wealth preservation and tax-efficient succession planning.
• Step Two – Seek professional advice about the structure and governance of the company.
• Step Three – Incorporate the company with Companies House, including drafting tailored articles of association.
• Step Four – Allocate shares and define the voting and non-voting structure to manage control and ownership.
• Step Five – Establish robust financial processes, open a bank account, and identify specific roles within the company.

Setting up an FIC will take four to eight weeks on average, but this timeline could be significantly extended for more complex situations.

The Role of Family Investment Companies – Conclusion

In conclusion, Family Investment Companies offer a strategic way to manage wealth across generations. Creating an FIC has potentially significant operational, ownership, and taxation advantages compared to trusts, direct ownership, and partnerships. However, there are numerous pros and cons to consider, and whether an FIC will be appropriate for your situation depends on the finer details. Consequently, taking advice before you even begin the setup process is critical.

Our team has essential experience, having set up FICs for many clients, creating a more structured approach to taxation, ownership, and intergenerational wealth transfer. If you would like to discuss family investment companies in more detail, please call us, and we can review the specifics of your situation.