Why are Family Investment Companies (FICs) a popular investment vessel?
Family Investment Companies (‘FICs’) are used as a means of facilitating the tax efficient transfer of wealth between generations. The creation of a FIC is beneficial such that it achieves Inheritance Tax savings, helps protect and maintain control over family wealth, while transferring that wealth to the next generation.
What is a Family Investment Company (FIC)?
A FIC is typically a UK resident limited liability company, the shares of which are owned by family members. Usually, the sole activity of the company is the making and holding of family investments.
A FIC can allow the founders of the business to retain some involvement in the company and possibly a managed income stream but also pass the investments down to their children or grandchildren. Broadly, this can be achieved with different classes of shares within the FIC, which can have varying rights to capital, income, and voting.
The primary aim of an FIC is to facilitate tax-efficient wealth transfer and provide a robust framework for managing family assets such as property, gifts and money. FICs have recently become a popular alternative to Trusts due to their tax benefits.
How does a FIC work?
Once the company is set up the individual can transfer assets to the company or loan funds to the company, in exchange for a combination of shares and loans. These assets transferred in could be cash, investments or property. In certain scenarios assets would be sold to the company for their market value with the value remaining outstanding on loan back to the original owner.
The FIC can hold various different investments i.e. UK or foreign shares, UK or foreign Investment property, for which each Investment would have different tax implications. Please contact us for more details on how different investments held within the FIC would be taxable.
The structure and governance of an FIC will vary depending on the objectives of the senior family members. The rights of the shareholders can be set out in the FIC’s Articles of Association. The Articles of Association could also stipulate family specific objectives, for example that the shares in the FIC can only be held by family members and family trusts.
FICs can be set up with alphabet shares to allow for different family members to have different share classes. FICs can also be set up with growth shares, growth shares work by the growth in the value of the company accumulating to the holder of the growth shares and effectively “freezing” the value of the shares held by the existing shareholders. This can be a useful way of passing the wealth to other family members, please contact us for more details on how to achieve this.
How are FICs taxed?
FIC have become a popular vehicle for estate planning. Historically, trusts were used for these purposes, but they are now subject to penalty tax charges and increased regulatory requirements.
Inheritance Tax (IHT)
The issue of new shares within the FIC does not constitute a gift for Inheritance tax purposes.
Making a gift of cash or shares to your children for the subscription of shares on formation of the company would reduce the value of an individual’s estate for Inheritance Tax (IHT) purposes, if they then survived 7 years from the date of gift (so the gifts were Potentially Exempt Transfers or PETs) the value of the gift will fall out of their estate for IHT purposes.
Corporation Tax
The current rates of corporation tax at which any income and capital gains are taxed within the FIC are significantly lower than the top rates of income tax and capital gains tax (CGT) payable when assets are held in the trust or directly by family members. If the profits are to be retained within the company no further tax would be payable but there will be further potential tax charges on any distribution of income or capital to the shareholders.
If the FICs annual profits fall below £50,000 corporation tax will be charged at 19%, and profits exceeding £250,000 will be 25%. Marginal relief rates apply to profits falling between £50,000 and £250,000. This is however subject to conditions.
Expenses incurred by the company in managing its investments and running its business will be eligible for corporation tax relief.
Tax on Dividends
When dividends are paid out of an FIC, they are taxed in the hands of the recipients. Individuals benefit from a dividend tax-free allowance, which has recently been reduced to £500 per year, and above that amount any dividends are taxed based on the individual’s marginal rate of income tax.
The tax efficiency of FICs arises from tax-free dividends being received by the FIC and then being reinvested.
How the FIC is taxed will depend on how the FIC is set up and the investments it holds. Please contact us to provide more specific tax treatment for the FIC you wish to set up.
Advantages and disadvantages of a FIC
Tax benefits
There are many tax benefits to setting up a FIC, for example:
- In certain circumstances, an individual could make a gift on formation of the company to reduce the value of their estate for Inheritance Tax (IHT) purposes, by either transferring shares or cash for the subscription of shares to their children or grandchildren. These initial gifts are potentially exempt transfers (PETs) and if the individual as the donor then survives seven years from the date of the gift, the value of the gift will fall out of their estate for IHT purposes.
- An FIC can be used to reduce IHT where Business Property Relief (BPR) is not available, for example where the business consists of a property investment portfolio.
- The on-going accumulation of profits in the FIC will attract tax at the corporation tax rate (25%) which is currently much lower than personal income tax rates for higher rate taxpayers, making companies attractive vehicles to hold investments on behalf of individuals
- Extracting funds from the FIC can be done in a variety of ways including:
- Directors’ fees and salaries for the duties performed by each of the directors. These would be income for the directors and be chargeable to NIC but would be deductible for Corporation Tax.
- Dividends which are currently taxed at a low rate if they are within the basic rate band, i.e 8.75% (33.75% if higher rate and 39.35% if additional rate band). When extracting income through dividends, care should be taken that the settlement provisions do not apply.
For more examples of the tax benefits of a FIC or further ways to extract funds in tax efficient ways, please contact us for further details.
variety of ways including:
- Directors’ fees and salaries for the duties performed by each of the directors. These would be income for the directors and be chargeable to NIC but would be deductible for Corporation Tax.
- Dividends which are currently taxed at a low rate if they are within the basic rate band, i.e 8.75% (33.75% if higher rate and 39.35% if additional rate band). When extracting income through dividends, care should be taken that the settlement provisions do not apply.
For more examples of the tax benefits of a FIC or further ways to extract funds in tax efficient ways, please contact us for further details.
Tax traps
There are also a few tax traps with FICs, for example:
- A FIC may give rise to an element of ‘double tax’ on capital gains arising, however this can be managed. Please contact us for more details on how to manage this.
- Shares that have income rights without capital or voting rights would be considered as substantially a right to income which may therefore fall within the settlements legislation and so shares with full voting, capital and income rights should be considered instead.
For more examples of the tax traps in a FIC, please contact us for further details.
Administrative requirements
- The disadvantages of setting up an FIC are the administrative requirements of running a company, the possible double layer of tax on profits extracted, and a liquidation or a demerger, if the future generation wanted to realise or split the business in the future, could be costly however this is a complex area and we can look at this separately when the time comes.
- The structuring of FICs is a complex area with various options on how to hold the shares therefore if an FIC structure is implemented, it is advisable that legal advice is sought in addition to tax advice.
Key considerations
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FICs are designed for long term investment
Much like trusts the aim is to accumulate wealth. Personal tax liabilities may occur on the extraction of funds from the company.
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Legal advice is necessary
Establishing an FIC involves incorporating a limited company. This requires drafting and filing the necessary documents, including the Memorandum and Articles of Association, with Companies House.
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As a FIC is based on a UK company, Companies House filing requirements apply
Essentially as you have set up a company, there is a lot more administration than other investment or succession funds. Our team can assist with these administrative tasks associated with having to run a company such as bookkeeping, accounts, payroll, VAT and tax returns.
How can Price Bailey help?
Establishing a FIC must be thoroughly considered depending on your goal, needs, and specific circumstances. Despite the benefits of a FIC, as with every potential investment, disadvantages also occur and advice on your specific circumstance is advised. Our team at Price Bailey are suitably positioned to deal with enquiries regarding FICs.
Should you require further detail please complete the form below to contact one of our experts…
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.