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In spite of the fact that Family Investment Companies (FICs) have been around for quite some time, only in the most recent few years has there been an increased understanding of the versatility that such a vehicle provides. Because it enables parents to keep control over assets while simultaneously amassing wealth in a tax-effective manner and making future succession planning easier, the usage of such firms is particularly appealing to director-owners of family enterprises who also have children.
What is an FIC?
A family investment company, or FIC, is a specialised vehicle that can be utilised in place of, or in conjunction with, a family trust. It is a private company, and rather than engaging in trading, its primary focus is on investing (the investments typically being equity portfolios or property). The shareholders are members of the same family who have taken advantage of the usage of Alphabet shares, which gives each direct descendant member of the family the opportunity to be allotted a different class of share.
An FIC is often held with a founding share that is set by the individual(s) supplying the capital, which can take the form of either a cash loan or assets on which a chargeable gain has not yet been realised. If the loan is in the form of cash, the FIC will utilise the funds to buy assets (such as property) that will provide a return on the money. This kind of revenue is either reinvested inside the FIC itself, or it can be put toward the tax-free repayment of the initial loan.
“Alphabet shares” give family members the opportunity to exercise varying degrees of influence over the decisions that affect the company, as well as the rights to collect dividends and the entitlements to the company’s capital value. When a FIC is incorporated, the individual who is responsible for establishing the company has the ability to continue serving in the roles of Director and preferred Shareholder while also owning ‘A’ shares. Such a shareholder will have the ability to choose a director and vote at general meetings (and thus, as a result, have control of the company), but they must not be eligible for dividends or any return of capital of any kind. After then, further members of the family, and frequently family trusts, are brought in as shareholders, and each of them receives one ‘B’ share. These ‘B’ shares do not come with any voting or control rights, but they do give the holder the right to any dividends and/or return on capital. If the kid is still a minor, the shares can be held in trust for the child.
Advantages of Using an FIC
- If assets instead of cash are transferred into the FIC, after seven years, the value falls outside the transferors’ estate for IHT purposes. Having said that, it is essential that there be no beneficial interest in the company held by anyone.
- Assets can be deposited in an FIC without restriction, while a Lifetime Discretionary Trust has a £325,000 maximum before IHT is imposed. Above this amount, there is a twenty per cent tax imposed on the value that is transferred into a trust.
- As a company, an FIC pays corporation tax on income, which is lower than income tax. Residential mortgage interest is completely reclaimable and not limited to the base rate tax credit as with buy-to-let properties.
- In the event that earnings are taken out of the company, the shareholders will be held responsible for paying tax. An FIC can allocate dividend payments to family members tax-efficiently.
- The company’s articles of association have the potential to be set such that they include certain clauses that safeguard the shares in the case of certain events (e.g. by preventing shares from being transferred outside of the family.)
Tax trap
When a property is used to subscribe for shares in a company, the donor may be subject to capital gains tax (CGT) and/or stamp duty land tax if the property was transferred into the FIC rather than being paid for with cash. As a consequence of these expenditures, the utilisation of the FIC structure may be deemed impractical.