• 29 Nov 2024
• •
• 4 min read

A guide to Family Investment Companies (FICs)

Family investment companies (FICs) have in recent times become a popular estate planning vehicle. They are often used as an alternative to trusts but we have also seen them work alongside family trust structures.

FICs offer several benefits, including wealth preservation, tax advantages, and flexibility in managing family wealth across generations. This guide aims to provide you with a basic understanding of family investment companies and their key features.

What is a Family Investment Company (FIC)?

A FIC is typically a UK private company where the shareholders and often the directors are members of a family. As with any company, a FIC can hold a variety of assets including cash, shares and property. The directors of the FIC are often parents who want to transfer wealth to the next generation whilst retaining control over the family assets. This can be done by separating the voting power from rights to capital and income through the use of ‘alphabet shares’.

Structure of a FIC

The separation of share classes is usually done at the initial creation of the FIC and gifting of the non-voting shares is also done at this stage while the shares hold little to no value. There is therefore usually no Capital Gains Tax (CGT) liability at this stage. The gift of shares is potentially subject to inheritance tax (IHT) however, if the individual making the gift survives for seven years, no IHT charge will arise.

After the FIC has been created, the share classes have been structured, and shares have been gifted, the FIC is then usually provided with assets and this can be done either through an outright transfer of assets or a loan of funds to the FIC on commercial terms.

The loan option usually adds further flexibility and tax efficiency as it is tax neutral – the person loaning the funds has not made a disposal for CGT purposes and neither have they made a gift, which is subject to IHT. In addition, over time, money can be extracted from the FIC by way of repayment of the loan without tax consequences. Funds loaned to the FIC are usually invested with any income or capital gains generated on such invested funds remaining within the FIC and therefore ringfencing growth away from the estate. 

Similarly, assets could be transferred to the company in return for a loan. Whilst this will be a disposal for CGT purposes, there is no transfer of value for IHT purposes. In addition, there would be stamp duty however, the rate would be low. This could be a good option for individuals holding assets which might substantially grow in value at some point in the future.

What about trusts?

Discretionary family trusts can still come into play in FIC arrangements. Cash can be given up to the available nil-rate band on discretionary trusts and the trustees can use these funds to subscribe for shares in the FIC. A couple could potentially give £662,000 tax free by utilising their nil-rate bands (£325,000 each) and two years’ annual allowances (£6,000 each).

Other considerations

There are filing requirements for companies however, the FIC could be set up as a UK unlimited company rather than a UK limited company in order to reduce these requirements. If the company is likely to hold property this would not be recommended as unlimited companies do not have the same protection from creditors as a limited company.

Currently, most FICs will pay corporation tax on profits and chargeable gains which (in the 2024/25 tax year) is currently 25% as they are generally close investment holding companies. However, most dividends received by a UK company are exempt from corporation tax.

Corporation tax rates are significantly lower than the rates of income tax (although 1% higher than the current main rate for CGT) however, income tax will be payable on any dividends declared by the FIC and on the extraction of capital growth. There are potentially therefore two charges to tax on extraction of profits: one at company level and one at shareholder level, although this can potentially be managed depending on effective tax rates.

What do HMRC think of FICs

It is important to note that FICs have been subject to HMRC scrutiny. In 2019 they set up a specialist unit to review the use of FICs, however, the unit was disbanded in 2021 and it was concluded that there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours.

How can Trethowans help?

FIC arrangements are bespoke and require detailed advice from solicitors and accountants. Our private client and corporate teams have expertise in advising on and creating FICs. We work closely with your advisors to ensure all ground is covered and that consideration is given to your wills, other lifetime gifting and tax planning options.

If you require further information about anything covered in this briefing, please contact us on 0800 2800 421 or get in touch here.

Disclaimer

This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.