Family Investment Companies (FICs) have grown in popularity in recent years, as families look at ways of managing their wealth and tax liabilities.
To give you a better idea of how they function and the benefits of utilising this structure, our experienced tax team have put together this useful FAQ.
If you are interested in establishing an FIC, it is important that you seek advice tailored to your unique requirements and circumstances, so please use this as guidance before contacting our team.
What is a Family Investment Company?
A Family Investment Company (FIC) is a limited company that you and your family have shares in that holds assets and investments in a structure where they can grow over time.
Usually founded by parents or grandparents, FICs give you control over assets and allow you to manage the wealth accumulated before eventually transferring the company to their children or other younger family members, when the time feels right for you.
How do I set up an FIC?
The process of setting up an FIC is fairly simple and starts with registering the company with Companies House.
By doing this, you confirm the name of your company and who the directors are. Like any incorporated company, you will need to abide by Companies House legislation, including registering People with Significant Control and submitting an annual confirmation statement.
At this stage, you also need to decide the company’s registered office and what the shareholding structure will look like.
Once registered through Companies House, you need to create a shareholder’s agreement, which will validate how the company will be managed and the shares distributed and transferred.
You will need to consider the shareholding structure of your FIC with different family members holding different forms of shares.
For example, you might decide to distribute ordinary or preference shares to family members, which will provide different payments at different times or offer unique rights to certain individuals.
Holding different share titles gives senior family members the ability to retain control and pass wealth through the company in a way that is tax efficient.
The FIC you set up needs a clear and effective investment strategy that all shareholders are satisfied with, which enables your FIC to grow.
There are a number of investment avenues you may choose to explore, but it’s important you choose the right one that aligns with your overall ambition.
You may explore opportunities in property, stocks and bonds and/or private equity, but it is best to seek professional advice to ensure that your strategy meets your objectives.
How can I fund an FIC?
FICs can be funded through capital contributions, loans and gifting assets. Funding through cash means it can be put through the FIC as a loan, which offers financial flexibility, as funds can be extracted without having to draw dividends.
Investing non-cash assets, like property, is slightly more complicated. Before deciding to fund your FIC with non-cash assets, it’s important to check the tax implications that could come into play.
You may have to pay Stamp Duty and Capital Gains Tax, so you need to seriously consider whether using non-cash assets is the right way to fund your FIC.
Does an FIC have tax advantages?
FICs do bring some tax benefits. Any capital gains generated by the FIC will be subject to Corporation Tax, as opposed to Capital Gains Tax on any individual.
Your FIC will pay a Corporation Tax at a rate of up to 25 per cent, rather than Capital Gains Tax.
In addition to this, because an FIC pays Corporation Tax, shareholders may be able to mitigate a higher Income Tax rate of up to 45 per cent that they would otherwise pay if the income or gain was treated as personal to the individual.
When it comes to Inheritance Tax (IHT), when you gift shares in the FIC to family members and other shareholders, your estate value decreases, lowering the potential for an IHT bill, subject to gifting rules and time limits in place at the time of any gift.
What should I do if I am considering setting up an FIC?
FICs are an efficient way to put an effective wealth management plan in place with added benefits of Inheritance Tax Planning opportunities. They offer flexibility and give your family the ability to discuss investment opportunities and make decisions that will help the FIC grow.
Before setting up an FIC, you should seek professional tax and financial advice so that you understand what an FIC is, how they work, your legal obligations and what the potential tax benefits and implications are, as well as ensuring the FIC is set up correctly from the outset to achieve your goals.
Considering setting up your own Family Investment Company or want to find out more? Please contact your Seymour Taylor representative who will be able to arrange a meeting to discuss this further or contact us on 01494 552100 or enquiries@stca.co.uk