Family Investment Companies
A Family Investment Company (FIC) is a private company which can be used to hold a broad range of assets including property, cash and investment portfolios. It provides a mechanism to control assets while accumulating income in a tax-efficient manner. It also enables family succession planning and provides an effective tool for wealth planning too.
How can current generations pass assets on to the next, tax-efficiently while maintaining some control? Trusts have been a traditional answer, but a FIC can be a good alternative.
Below are highlights of some of the main features and advantages of a FIC. It assumes the FIC will be UK-resident for tax purposes, although if a non-UK resident FIC may be preferable, then we would be happy to discuss this. The comments below are not intended as formal advice and are non-exhaustive. Please let us know if you require formal advice on any aspect.
What is a Family Investment Company?
A FIC is a private company which can be used to hold a broad range of assets including property, cash and investment portfolios. It provides a mechanism to control assets while accumulating income in a tax-efficient manner. It also enables family succession planning and provides an effective tool for wealth planning too.
Establishing a Family Investment Company
Limited or unlimited liability
A FIC is simply formed just like any other private company. The majority are formed as limited liability companies, although it is possible to choose an unlimited liability company although this is much rarer in our experience.
The main advantage of using an unlimited liability company is that there are fewer statutory filing requirements, including an exemption from filing accounts, which may be desirable from a confidentiality perspective. However, a very significant risk factor with unlimited companies is their unlimited liability status. This means that if an unlimited company fails to pay its debts, shareholders past and present will be liable. There is no limit on the liability of present shareholders although the liability of past shareholders is subject to some exceptions.
On the other hand, limited liability companies must file statutory accounts, although shareholders generally have limited liability, although they can still be liable as directors in certain circumstances.
Constitution of the FIC
The Articles of Association of the FIC, as well as any shareholders’ agreement will set out how the company will be run. This will cover, for instance, the powers and duties of the directors, how they are appointed and removed, sharing of profits and how decisions are made, including any veto rights and other protections for minority shareholders.
The FIC members can be issued with different classes of shares that have different rights. These rights can cater for different entitlement to dividends, capital and voting.
It is also important to address such matters as restrictions on transfers of shares, permitted transfers and compulsory transfers.
It is very important that careful thought is given to these matters to reduce the risk of costly disputes if there are differing views as to how the company should be run or if unfortunate events such as divorce or death occur.
Tax implications of a Family Investment Company
Funding the FIC
Funds can be provided to the FIC by subscribing for shares or by way of loans. Cash is generally used to provide the FIC with its initial funding. If cash is unavailable, it is possible to transfer assets to the FIC. Transferring assets may have capital gains tax implications and could trigger a stamp duty or stamp duty land tax charge, depending on the asset transferred.
The main tax advantage of the FIC is that income and gains relating to the assets owned by the FIC are subject to corporation tax on income and chargeable gains. The current main rate of corporation tax is 19%, although this is set to increase to 25% from April 2023.
Importantly, as a company, the FIC is generally not liable to UK tax on dividend income. This is unlike dividend income received by trusts which is taxed at the rate of 39.35%.
The FIC’s allowable expenses, such as recurring legal, professional and investment management fees, will obtain relief from corporation tax. FICs also benefit from a tax deduction for residential property finance costs, unlike the position for personal investors.
Income tax
Funds extracted from a FIC are subject to personal income tax. Common methods of extraction include dividends, salary and pension contributions. If the founders of a FIC pay tax at the highest rates, extraction of funds should be carefully planned.
If a founder invests in the FIC by way of a loan this enables them to receive repayments out of the FIC’s profits free of tax. The loan would need to be structured carefully to avoid HMRC challenge.
Every individual has a dividend allowance of £2,000 (reducing to £1,000 from 6 April 2023 and £500 from 6 April 2024). While dividends paid to minor children under the age of 18 are taxed as if they were the parents’ income, dividends paid to any adult children would be subject to their own dividend allowances and personal allowances. This may be useful, for instance, for contributing to university fees and living expenses.
We can provide advice on tailoring the founders’ remuneration package to mitigate income tax on extraction of funds.
Inheritance tax
Gifts of assets to a FIC are subject to Inheritance Tax (IHT) as chargeable lifetime transfers (CLTs). Provided the donor survives for seven years after the date of the gift, the CLT is subject to a rate of IHT of 20%, after applying any remaining nil-rate band, exemptions or reliefs.
Inheritance tax may apply on gifts made by the FIC as if they were made by the members. Exemptions may apply and we can advise on this.
How can Moore Kingston Smith assist?
We are highly experienced in providing bespoke tax advice to clients on FICs, as well as other structures for succession planning such as trusts and family limited partnerships.
In advising on establishing a FIC, we will advise on all aspects, including the following:
- Establishing the FIC;
- Tax-efficient extraction of funds;
- IHT implications and mitigation;
- More complex structures, for instance including discretionary trusts in addition to the FIC, or non-UK resident FICs, depending on your requirements; and
- Potential application of anti-avoidance legislation including the transactions in securities (TiS) rules, disclosure of tax avoidance schemes (DOTAS) rules and general anti-abuse rule (GAAR).
We also have our own in-house team of solicitors who provide a range of legal services to companies and individuals. Our legal team advises on the legal documents to establish the FIC, including drafting Articles of Association and shareholders’ agreements, as well as Wills and Lasting Powers of Attorney. Our tax specialists are happy working with either our own legal team or your existing lawyers, as you prefer.
Many clients seek independent financial advice and professional investment management for the monies held within their FIC. We are one of only a small number of accountancy firms who are able to offer a fully integrated advice service to our clients with our own firm of chartered independent financial advisers.
Moore Kingston Smith Financial Advisers (MKSFA) are able to work closely with the tax and legal teams to assist in implementing a bespoke investment strategy to assist you in meeting your objectives and protect your wealth.
Our company secretarial department is also available to provide ongoing company secretarial services.
Please contact the team below to discuss your requirements further.