The article examines a structure called the "family investment company" - in particular, its tax and wealth transfer benefits.
A term readers might have heard in passing is the “family investment company”. This is not identical with “family office” but in these days of constantly shifting vocabulary, it is easy to see how it might cause confusion. In the UK, they have a specific meaning when it comes to tax and transfer of assets.
In this article, from Irwin Mitchell Private Wealth, the law firm, partners Helen Clarke and James Paton-Philip consider the details. The editors of this news service are pleased to share these insights and invite readers to respond to: firstname.lastname@example.org. (More details on the authors are below.)
Family investment companies are increasingly being used by individuals who want to protect and maintain control of family wealth, whilst transferring capital and income to the next generation in a tax-efficient manner. They have become more popular since the trust tax law changes in 2006. The government made it increasingly difficult to use trusts without incurring tax charges and whilst trusts serve a great asset protection purpose they are perceived as a method of tax avoidance.
With decreasing corporation tax rates and the ability to avoid entry charges to tax, corporate structures for estate planning have become more attractive.
FICs can therefore be used in addition to or, in some cases, as an alternative to trusts.
What is a typical FIC structure?
A FIC is a private company whose shareholders are family members across different generations. A FIC is usually established as an investment company and uses different classes of shares to accumulate and distribute wealth across the family.
FICs commonly have the following features:
-- Two or more classes of shares. For example, the principal contributors to the FIC may be the sole holders of voting shares while non-voting shares are held by other family members;
-- The ability to invest in a very broad range of investments;
-- The shareholders are also the directors;
-- Funding from either share capital or debt;
Example FIC structure
What are the key benefits of a FIC?
-- Bespoke. FICs allow the governance and distribution of investment wealth to be tailored to particular family needs. They can hold almost any kind of asset and use different share classes and constitutional rules to divide benefit and control as appropriate;
-- Tax efficiency. If done correctly, there will be no IHT charge on a transfer of assets to a FIC. Capital gains tax may be payable if certain assets are transferred. FIC profits are taxed at corporate tax rates which are attractive compared with personal and trust tax rates. Where income is surplus to the shareholders’ requirements, it can be “rolled up” within the FIC;
-- Limited liability. Shareholder liability is usually limited to the paying up of their shares, but shareholders can also retain substantial control over the company;
-- Retention of control. Unlike with trusts, a founder has the opportunity to influence investment policy and select investment advisers. A suitably qualified professional can draft the constitutional documents to work from a wealth planning perspective; and
-- Asset protection. If shares are gifted to children or other family members, restrictions can be included in the articles to prevent them being transferred. This could be particularly important to prevent shares being transferred to a spouse on divorce.