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: tom.burroughes@wealthbriefing.com. (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.

What are the key tax implications of a FIC?
-- Capital gains tax. Cash can be transferred into a FIC tax free. However, capital gains tax may be incurred when non-cash assets such as property or equities are transferred to the FIC. It is important that the client’s legal/financial advisors work closely together at the point of creation of the FIC to make sure the process of transferring investments is as tax efficient as possible; 

-- Inheritance tax. One key difference between a FIC and a trust is that a FIC can be funded with a much larger value without incurring an immediate charge to inheritance tax (“IHT”). The maximum that can generally be transferred to a trust without charge is £325,000 ($410,804) per individual. A gift of cash or shares is a potentially exempt transfer which is only chargeable to IHT if the transferor dies within seven years of the transfer. When valuing an individual’s shares for IHT purposes, a discount will be applied to reflect the size of interest;  

-- Income/corporation tax. FICs are subject to corporation tax on their income and capital gains generally. The current rate of corporation tax is 19 per cent, but this is due to reduce to 17 per cent from 1 April 2020. Most dividends received by a FIC are exempt from corporation tax, regardless of whether the dividend has a UK or overseas source. Unlike for individuals, a FIC benefits from an indexation allowance on gains, meaning that only returns above the level of inflation will be taxed; 

-- No tax is paid on the first £2,000 of dividends received by a taxpayer in a tax year. Above this allowance, income tax is paid at rate(s) according to the shareholder’s marginal rate of tax; and 

-- Double taxation. One key risk of a FIC is the potential for double taxation, although there are various ways that this can be mitigated. The FIC’s profits will generally be subject to corporation tax and any dividend distributions may also be subject to income tax. 
  
What are the key planning issues for the FIC structure?
-- Funding the FIC. If an individual may need to withdraw value from the FIC in the near future, providing a loan to the FIC may be the most efficient way of doing so. However, a loan will not remove value from an individual’s estate for IHT purposes: the right to repayment of the loan will hold the value. Therefore, if an individual subsequently gifts their shares to other family members they will only be giving away the future increase in value of the assets in the FIC; 

-- Governance. Good governance can be just as fundamental in a family-run company as it is in other types of business. In most cases it is very beneficial to enter into a “Family Charter” which sets out the roles of the family members in the business, objectives of the business and a structure for the strategy and maintenance of the FIC. The Family Charter can also build in environmental, social and corporate governance. Lawyers and wealth management advisors can work together to build in criteria that support the family’s objectives, values and goals; and 

-- Long-term investment. When setting up a FIC, it is important to consider carefully how the existing and future investments should be structured, for example to ensure tax efficiency and to manage risk. Specialist independent investment advice should be sought to navigate around the vagaries of the tax rules applicable to investments in company structures. For example, dividends and interest from overseas may be subject to withholding tax. A clear investment strategy combined with joined up legal, tax and investment planning will enable the FIC structure to meet the particular needs of the family and future generations; and 

-- Tax benefits.  As explained above, the FIC structure has many tax advantages as a long-term investment structure. It can be a very effective way of reducing the founder’s estate for IHT purposes whilst maintaining control and gradually introducing other family members to the business. It is important that these benefits are secured by structuring the FIC shares amongst family members in the most appropriate way.    

FICs can be a very useful vehicle for managing and distributing family wealth, without the need to involve trusts. As with any kind of estate planning, it is important to get specialist advice on the set up and ongoing administration of a FIC.

The authors:

Helen Clarke is a Tax Trusts and Estates Partner and James Paton-Philip is a Corporate Partner at Irwin Mitchell.