Family Investment Companies (FICs) are gaining attraction among high-net-worth individuals as a preferred option for tax and succession planning. When contemplating your family’s financial future, trusts may come to mind as a popular option. While trusts provide various structures with their own tax advantages and considerations, it’s worth exploring alternative avenues for succession planning, such as Family Investment Companies (FICs).
Family Investment Companies serve as a lesser known but increasingly favoured wealth management tool. They appeal to clients who desire to transfer generational wealth while maintaining greater control over how family members manage invested assets. Considering the benefits of FICs can provide additional flexibility and strategic options for passing down wealth within the family.
In this article, we will discuss in detail regarding benefit of the FIC and Trust in tax planning and succession planning.
Family Investment Company
A Family Investment Company (FIC) is a type of private limited company which is established to manage wealth, preserve assets, and potentially pass wealth down to future generations by way of shares in that company.
A Family Investment Company (FIC) is a planning structure that is used to transfer value to the younger generation while at the same time allowing the older generations to maintain control over the assets without creating an immediate inheritance tax (IHT) charge.
Trust
A trust is a way of managing different assets such as money, investments, land, or buildings for beneficiaries. We can find different types of Trusts as per HMRC, and they are taxed differently.
Trust involves the ‘settlor’-the person who puts assets into the trust; the ‘trustee’-the person whose job is to manage the Trust; and the ‘beneficiary’-the person who can benefit from the Trust.
Advantages of Family Investment Company as compared to Trust
1. Inheritance Tax on Creation
A FIC can be set up without triggering an immediate lifetime inheritance tax (IHT) charge.
But transferring money or assets to a Trust above the IHT nil-rate band allowance of up to £325,000 per person will lead to an immediate lifetime IHT charge at 20%.
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2. Providing Fund
FICs can be funded in several ways, e.g., by making a loan or by subscribing for shares. When FIC is funded by way of a loan, this loan can be repaid to the founder when appropriate to the FIC. Money or assets added to a Trust cannot usually be repaid to the founder.
3. IHT Charges
Trusts are subject to ten-yearly IHT charges at a rate of up to 6% and proportionate charges on the distribution of capital. On the other hand, IHT charges are not applicable to FICs.
4. Tax on Income and Capital Gains
A FIC’s income and capital gains are generally taxed at the corporation tax rate (19% to 25 %, as the case may be). This is lower as compared to personal tax rates and the rates which apply to Trusts. This helps an FIC to accumulate value faster than a Trust. Dividend income received by FICs can be tax-free if it is from other companies and if all the relevant conditions are fulfilled.
5. Introducing the Younger Generation
FICs may offer greater scope for introducing the younger generation of the family into the management of family wealth. For example, the younger generation can be involved as shareholders before becoming directors. FICs can enable wealth and assets to be passed from generation to generation whilst ensuring that the founder shareholders retain suitable control. However, in the case of Trust, wealth got passed to beneficiaries only. However, the only thing to keep in mind is that mortgage providers or lenders don’t recommend it when shareholders are below 18 years old.
6. Capital Growth
‘Growth shares’ and ‘freezer shares’ can be used to finely calibrate when capital growth accrues to classes of FIC shares. For IHT Planning, it can be useful.
Disadvantages of Family Investment Company as compared to Trust
1. Cost for Set Up
Generally, setting up FICs is more than a Discretionary Trust. Setting up a FIC involved more processes as compared to Trust.
2. Capital Gains Tax
When a Family Investment Company is funded by transferring assets to the Family Investment Company, there may be chances of a capital gains tax (CGT) charge.
3. Double Taxation of Income
There can be double taxation if we distribute FIC’s post-tax profits to shareholders as dividends. It means that after FIC has paid the tax, shareholders may again have to pay income tax on that income that has already been taxed within the FIC.
4. Compliance Work
FICs require greater public reporting requirements than Trusts, even when a FIC is set up as an unlimited company. However, in the recent scenario, most kinds of Trusts need to register with HMRC’s Trust Registration Service.
5. Who Can Benefit
A FIC can only distribute money to its shareholders. However, Discretionary Trusts can have various categories of beneficiaries. It can also be made better by holding FIC shares in a Discretionary Trust.
6. Winding Up
FICs cannot be easily wound up as compared to Trusts.
For comprehensive support in understanding and managing your Family Investment Company, explore our dedicated services.
Conclusion
Hence, we can conclude that Family Investment Companies (FICs) offer several advantages over Trusts when it comes to wealth management and succession planning. FICs provide greater control over assets during the founder’s lifetime, offering flexibility tailored to the family’s specific needs.
They also provide tax efficiency, asset protection through the corporate structure, and seamless intergenerational wealth transfer. FICs present an alternative with more control and flexibility compared to Trusts, making them a preferred choice for many individuals seeking effective wealth management and succession planning solutions.
If you’re considering setting up a Family Investment Company or Trust, it’s essential to get expert advice tailored to your specific circumstances.
Contact us today and let us help you make the best decision for your family’s wealth management.
