Why are Family Investment Companies (FICs) a popular investment vessel?

Following the Autumn Budget 2024, Richard Grimster, Partner and Head of Tax, shares his thoughts on why FICs may now become a popular investment vessel:

Given the certainty provided by todays fiscal event for the corporate tax regime, contrasted with the increased IHT take from previously qualifying assets held more typically by trusts, we expect many more wealthy families to consider Family Investment Companies as a means to facilitate the transfer of wealth while retaining sufficient levels of control.

[Article updated 31 October 2024]

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 often immediate tax efficiency for income producing assets, future 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 gifts and/or different classes of shares within the FIC, which can have varying rights to capital, income, and voting.

The primary aim of a FIC is to facilitate tax-efficient wealth transfer and provide a robust framework for managing family assets such as property, investment portfolios and money. FICs have 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, 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 a 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 or private shareholders agreement. These constitutional documents could also stipulate family specific objectives, for example that the shares in the FIC can only be held by or transferred to 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 disproportionately direct the future value of the company to the holder of the growth shares and effectively “freeze” the value of the shares held by the other 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 high rates of tax on income and periodic Inheritance Tax charges as well as increased regulatory requirements.

That is not to say there is not a place for Trusts within a FIC scenario; it is common for FIC shareholdings to be transferred to and held in Trust.

Inheritance Tax (IHT)

The initial creation of the FIC does not usually constitute a gift for Inheritance tax purposes, there is no change in the person’s taxable estate if they sell assets to the FIC for their current value.

Making a gift of cash to subscribe for shares (or a gift of shares as is sometimes preferred) to your children would reduce the value of an individual’s estate for Inheritance Tax 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.

FICs are always close companies and because they are designed to hold investments will pay tax at the 25% corporation tax rate and will not qualify for marginal relief or the small companies’ rate of 19%.

However, they are able to benefit from the wide tax exemptions for dividend income which means that they can be a very efficient way to hold investment portfolios targeting income returns.

Expenses incurred by the company in managing its investments and running its business will be eligible for corporation tax relief which can include interest paid on loans from the family, pension contributions for those helping manage the investments, etc.

Tax on Dividends

When dividends are paid out of a FIC, they are taxed in the hands of the recipients. There is no UK withholding tax on dividends paid.

UK resident individual shareholders will 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.

How the FIC and the family are taxed will depend on their personal circumstances including how the FIC is capitalised, the rights of the various share classes 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

It is often considered much easier to gift small holdings in a company than to gift small percentage ownership in a large number of underlying assets. As such a FIC can help families navigate joint ownership in a structured way.

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.
A 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 although the overarching purpose of the FIC is typically to reinvest profits and create long term value.

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:

Capitalising a FIC with existing assets held at gains can create large capital and transfers taxes (eg, a property portfolio transfer can trigger CGT and SDLT). Establishing the FIC in as efficient a way as possible requires a good understanding of your existing assets and affairs.
A FIC may give rise to an element of ‘double tax’ on capital gains arising, however this can be managed with planning on when best to the extract profits to best use lower rate tax bands & allowances. 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 a FIC are the administrative requirements of running a company and the public nature of its filings, the possible double layer of tax on profits extracted, and the costs of exiting the arrangement by liquidation or demerger if the FIC becomes unsuitable for future generations.
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

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.

Legal advice is necessary

Establishing a FIC involves incorporating a limited company. This requires drafting and filing the necessary documents, including the Memorandum and Articles of Association, with Companies House.

As a FIC is 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 goals, needs, and specific circumstances. Despite the benefits of a FIC, as with every potential strategy, disadvantages exist too and so you should appoint an adviser who is able to help you navigate these and critically assess the likelihood of a FIC being appropriate for you. 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.

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