The authors of this article examine the subject of Family Investment Companies and issues around transfer of wealth and business.

The task of working out the most effective way to hand wealth to family members has never been more talked-about, given the complexities of today's economy and markets. The ways in which such transfers can occur proliferate. An addition to the transfer toolbox is what is called a Family Investment Company, or FIC (yet another addition to the alphabet soup of acronyms that wealth managers must try to remember). As the word "company" suggests, there is a corporate structure quite different to the world of trusts.

To get some understanding around the topic and explore the finer details, Kate Hamilton and Rebecca Fisher, who are partners at Russell-Cooke, the law firm, share their comments.

Their views aren't necessarily shared by the editors of this news service but such comments are welcome additions to debate. To contact the editor, email tom.burroughes@wealthbriefing.com

Family Investment Companies have recently become a popular option for those looking to pass wealth down to family members.  Their rise in prominence is down to several factors, not least historically low rates of corporation tax contrasted with the harsher tax treatment of a traditional discretionary trust arrangement.

As many readers will be aware, a FIC corporate structure generally involves giving junior family members shareholdings in a company which owns significant income generating assets, and the majority of the economic benefit, whilst the parents retain control.

Whilst a FIC should always be a consideration for those reviewing their options in relation to wealth management and succession, their recent surge in popularity does not mean they are a “one size fits all” solution, or without their drawbacks.  

Most financial advisers will be able to address the tax benefits and disadvantages of a FIC (for example, as a general rule, a FIC is unlikely to be suitable if it is intended capital will be extracted from the company in the short term), but there are also wider issues to consider in a commercial, family and private client context. For example:

- Shares as assets

A traditional discretionary trust does not involve any family member having a defined interest in the trust fund (albeit they have certain residual general rights as beneficiaries).  By actually putting FIC shares in the hands of junior family members, it gives them a defined, tangible asset, as well as the status of shareholders and rights which come with that (for example, the possibility of making a complaint of unfair prejudice under the Companies Act).

- What happens on a divorce

Given the family relationships which underpin a FIC, it is important to consider the implications of one of the participants divorcing.  

If the parents divorce, they retain control of the company but generally not the fundamental asset base or entitlement to income deriving from the FIC, which could well be ignored for the purposes of assessing the size of the marital estate.

If one of the children divorces, it would be crucial to ascertain when junior family members could access their economic interest in the FIC, how specific their entitlement is and how liquid it is, and what controls are attached to it. How the company is run and how the assets and income are managed, will need to be explored to give the family courts an idea of whether this is a resource available to be divided as part of the marital estate.

- What happens on death

The shares, much the same as any other asset, form part of an individual’s estate on death for both succession and IHT purposes. The value of the FIC shares will be closely related to the rights and entitlements attached to them. The FIC’s governing documents should deal with the transferability of shares on the death of any shareholder and the wills of the individual shareholders should be aligned with this.

From an IHT perspective, FICs are attractive structures because they enable the ‘founder(s)’ to transfer wealth into a company without incurring the 20% entry charge that applies to lifetime trusts. This should be contrasted with other shareholders who may have significant value attached to their shares. Much will depend upon the extent of an individual’s holding and whether they are minority shareholders.

It is important to be mindful that, unlike transferring assets into trust, the founders’ shares (together with the rights attaching to them) remain in their estate. Consequently, using a FIC does not prevent third parties from bringing a potential claim against their estate on death.

Ultimately, a FIC is likely to offer a significantly more tax efficient alternative to a trust for those who are willing to have capital tied up in a corporate vehicle in the long term. However, those tax benefits need to be balanced against other wider considerations, not least the almost complete asset protection afforded to trusts, but not to a FIC.  

About the authors
Rebecca Fisher and Kate Hamilton are partners in the private client and family groups at Russell-Cooke. They advise families and individuals on all aspects of private client law including wills, estate planning, administration of estates, trusts and powers of attorney.  Russell-Cooke are a top 100 firm advising a mix of commercial, not-for-profit, regulatory and personal clients.