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 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. Ownership is with the shareholders, but 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 that wealth is managed or when benefits are received. The control aspects of a FIC are key to the structure and are one of its 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 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 gift, the value of the gift falls 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 in the way a trust is, so it is not subject to 10-year anniversary charges or exit charges.
- There is no 20% IHT entry charge on the value transferred into a FIC in the way there can be with a trust.
The ongoing accumulation of profits in a FIC will attract tax at the corporation tax rate (19% at the time of writing, increasing to 25% in April 2023). These rates are often lower than personal income tax rates for higher-rate taxpayers, making FICs attractive vehicles for holding investments on behalf of individuals.
Should individuals wish to extract funds from the FIC, this is usually done by payment of dividends to shareholders. Because founders often hold different classes of shares to children or grandchildren, it is possible to pay dividends only to holders of one share class.
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 used to repay the founders' loan, so any underlying capital value can grow in the children's or grandchildren's name.
Summary
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. While trusts remain 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. For this reason, other models such as FICs are becoming popular as an alternative to, or in addition to, trusts.
For anyone seeking advice regarding the possibility of reducing potential IHT exposure, please contact Sutharman Kanagarajah, Head of Tax at Centralis Governance, Risk & Compliance.