A Family Investment Company (FIC) offers a tax efficient way to retain control over assets and pass them to the next generation. It is therefore worth considering them as part of a strategy for inheritance, succession and wealth planning.
Estate planning is not just about saving inheritance tax, although that may be a key objective of the founder (usually the parents). It is also about protecting and maintaining control over family wealth, while transferring that wealth to the next generation.
A FIC is a structure that enables ownership to be separated from control. The ownership is with the shareholders but the day-to-day management and control of the business is with the directors. Using a FIC enables a family to pass wealth down the generations without giving up control of how the wealth is managed or when benefits are received. The control aspects of a FIC are key to the structure, providing one of the most important features.
The main IHT benefits from a FIC include:
- A reduction of the founders’ estate as they can make a gift to children and/or grandchildren on the formation of the company by either transferring shares or cash for the subscription of shares. These initial gifts are Potentially Exempt Transfers (PETs) for IHT purposes so provided the donor survives seven years from the date of the gift, the value of the gift will fall out of their estate.
- A FIC can be used to reduce IHT where business property relief is not available, for example where the business consists of a property investment portfolio.
- A FIC is not within the relevant property regime like a trust is so it is not subject to 10 year anniversary charges or exit charges.
- There is no IHT entry charge of 20% on the value transferred into a FIC like there is with a Trust.
The on-going accumulation of profits in a FIC will attract tax at the corporation tax rate (currently 19% but increasing to 25% in April 2023). These rates are much lower than personal income tax rates for higher rate taxpayers, making FICs attractive vehicles to hold investments on behalf of individuals.
Should the individuals wish to extract funds from the FIC, this is usually done by way of the payment of dividends to shareholders. Because it is usual for the Founders to hold different classes of shares to the children/grandchildren it is possible to only pay dividends to the shareholders of one of the classes of shares.
A FIC is typically funded by way of loan from the founders. The FIC acquires assets (for example, listed shares) which generate dividend income. This income is either re-invested within the FIC, or is used to repay the founders loan. Thereby, any underlying capital value grows in the childrens’/grandchildrens’ name.
In the ever changing landscape of private client taxation and compliance the structures and vehicles available to meet a family’s estate planning needs are also evolving. Whilst trusts still remain a useful and popular means of wealth planning, they do have limitations, particularly in the amount of value that can be transferred without giving rise to IHT charges. It is for this reason that other models such as FICs are becoming popular as an alternative or in addition to trusts.
For anyone seeking advice regarding the possibility of reducing their potential IHT exposure please contact Sutharman Kanagarajah, Head of Tax.