A Guide to Family Investment Companies

Family investment companies (FICs) are a powerful tool for managing family wealth in a tax-efficient manner while maintaining control and facilitating smooth succession planning. This guide will help you understand what FICs are and how they can help you secure your family’s financial future.

Understanding family investment companies

FICs are private companies designed to manage and protect family wealth, offering tax-efficient strategies and structured success planning. Unlike traditional trusts, which may be legally intricate and not always optimally tax-efficient, FICs provide a great deal of flexibility, enabling them to be adapted to the unique circumstances and needs of each family.

Parents may find FICs a beneficial option for gifting their wealth to their children. Control can be set so that funds are not available to the children until they reach an appropriate age. Funding a FIC can be achieved through subscription to shares with cash or other assets, or by utilising debt such as interest-free loans.

Setting up a family investment company

Factors such as the choice between unlimited and limited companies, the appointment of directors and shareholders, and the creation of bespoke articles of association must be carefully considered when setting up a family investment company. Each of these elements plays an important role in ensuring that a family’s wealth is managed effectively and efficiently.

The choice of company structure is an important decision, as it will determine the legal and financial obligations, liability and operational flexibility of the FIC.

Unlimited vs limited companies

Weighing the pros and cons of unlimited and limited companies is a critical step in deciding the structure of a FIC. Unlimited companies offer confidentiality, while limited companies provide limited liability protection for shareholders.

This means that in a limited company, owners are only liable for the amount they invested in the shares in the company, whereas in an unlimited company, they are personally liable for the company’s debts.

Directors and shareholders

In a family investment company:

• Directors are responsible for overseeing the management of the company’s assets and the distribution of dividends to shareholders
• Shareholders receive financial benefits from the FIC
• It is common for FICs to issue different classes of shares, providing flexibility in dividend payments and the level of control exercised by various family members

Parents may be given A-shares that carry voting rights, but no dividends, while children can hold B-shares with entitlement to dividends. This requires parental approval. This structure allows parents to maintain control over the FIC while gradually transferring wealth to their children in a tax-efficient manner.

Articles of association

The structure of a family investment company is outlined by a set of legally binding rules and regulations known as articles of association.

Customising these documents to meet the unique requirements of the FIC and ensure compliance with all relevant laws and regulations is best done with the assistance of specialist legal advice.

Taxation of family investment companies

Family investment companies can be subject to various taxes, including Corporation Tax, Capital Gains Tax and Inheritance Tax. However, with careful planning and the utilisation of any tax reliefs and exemptions that apply, FICs can provide a tax-efficient environment for managing and protecting family wealth.

Corporation Tax

FICs are subject to corporation tax on their profits, with the current main rate being 25%. Profits generated within the FIC (which might include rental income from property portfolios or gains from equity investments) are subject to these corporation tax rates. As a result, FICs are required to pay Corporation Tax on their taxable income.

On the other hand, FICs can also benefit from certain tax reliefs and exemptions. Most dividends received by a UK company, including those from abroad, are free from corporation tax. This exemption applies regardless of the source of the dividend, and it is one of the reasons why being paid in dividends can be an attractive option for companies.

Capital Gains Tax

Capital Gains Tax is a levy on the profits generated from the sale or disposal of an asset at a higher price than its original purchase cost. CGT can be relevant when creating an FIC, disposing of residential properties within the FIC, or on dissolution of the FIC in the future.

Inheritance Tax

Tax planning for Inheritance Tax planning purposes is an important aspect of FICs, as it can help ensure a smooth succession process for future generations. By gifting shares to other family members or transferring assets to children, FIC founders can take advantage of tax and succession planning benefits, such as transferring assets tax-free after a period of seven years.

This can be achieved by making a potentially exempt transfer (PET), whereby the value of the gift will be excluded from the founder’s estate if they remain alive for seven years after the gift is made. Through careful planning, FICs can provide a tax-efficient means of transferring wealth to future generations while retaining control over the assets.

Managing assets and investments in a FIC

A family investment company can manage a wide variety of assets, such as property portfolios, equity investments and diversified holdings. By tailoring investment strategies to suit the unique needs and objectives of each family, FICs can provide an effective means of growing and protecting family wealth over time.

The different types of assets that can be managed within a FIC will be examined in greater detail in the following sections:

Property portfolios

Managing property portfolios within an FIC can offer several advantages, such as:

• Tax-efficient accumulation of rental income
• Potential for long-term capital growth
• Rental profits within the company are subject to corporation tax rates
• The FIC has the capacity to deduct any loan interest from the rental income, which is no limited for individual investors

By holding property portfolios within an FIC, families can:

• Generate income streams for members
• Offer flexibility in ownership rights
• Provide tax efficiency in accumulating profits
• Allow for the transfer of value to future generations while maintaining control of family wealth

Equity investments

Equity investments within a family investment company can also benefit from tax reliefs and exemptions. This can make equity investments an attractive option for FICs, providing the potential for long-term growth and income generation while minimising tax liabilities.

In addition to the tax advantages, equity investments in an FIC also offer benefits such as diversification, risk management and asset protection. By spreading investments across a variety of financial instruments and employing risk mitigation strategies, FICs can maximise returns and protect family wealth over the long term.

Control and succession planning in family investment companies

Family investment companies provide a practical framework for control and succession planning, allowing families to maintain control over their assets while facilitating the smooth transfer of wealth to future generations.

There are various strategies that can be employed in FICs to ensure effective control and succession planning.

Share classes and voting rights

Different share classes within an FIC can provide varying levels of control and entitlements for family members. Parents may be issued A-shares that are accompanied with voting rights but not dividend entitlements. On the other hand, children might possess B-shares with dividends provided their parents give consent. This structure allows parents to maintain control over the FIC while gradually transferring wealth to their children in a tax-efficient manner.

By carefully allocating shares and voting rights among family members, FICs can help ensure a smooth succession process while minimising potential conflicts and disputes. This can be particularly important in situations where family wealth is being transferred across multiple generations or where there are concerns about the financial maturity of younger family members.

Asset protection strategies

Asset protection strategies can be employed within an FIC to safeguard family wealth from risks such as creditors, lawsuits or family disputes. One example of an asset protection strategy is including specific clauses in the FIC’s articles of association to restrict share transfers and prevent ex-spouses from retaining shares in the event of a divorce.

By incorporating these and other asset-protection strategies in the FIC structure, families can help ensure the long-term preservation and growth of their wealth, even in the face of potential challenges and risks.

Gifting and Inheritance Tax planning

Gifting shares or transferring assets to children through an FIC can offer significant Inheritance Tax-planning benefits. For example, assets transferred to children are exempt from taxation, provided the transfer took place at least seven years before the transferor’s passing. This can provide a tax-efficient means of transferring wealth to future generations while retaining control over the assets.

Potential drawbacks and challenges of family investment companies

While family investment companies offer many advantages for managing and protecting family wealth, there are also potential drawbacks and challenges to consider. For example, distributing all profits can result in double taxation, making it more advantageous from a tax perspective to retain profits within the company. Additionally, asset transfers may be subject to Capital Gains Tax, Inheritance Tax and Stamp Duty.

Other potential drawbacks of FICs include high administrative costs, family conflicts and privacy considerations. Therefore, families must balance the benefits and challenges of establishing a FIC and consult professionals to help them meet their unique needs and objectives.

Professional assistance and expertise

A team of tax advisors, accountants and legal experts is necessary to establish, manage and maximise the benefits of a family investment company. These professionals can help ensure that the FIC’s structure and administration are tailored to the specific needs and objectives of the family, while also ensuring compliance with all applicable laws and regulations.

In addition to providing guidance on the setup and ongoing management of the FIC, professional advisors can also help identify and implement tax planning strategies that maximise tax efficiency and minimise liabilities. By engaging the services of experienced professionals, families can enjoy the peace of mind that comes with knowing their wealth is being managed effectively and efficiently.