When it comes to succession planning, a Family Investment Company (FIC) presents an alternative option for tax planning and facilitating the transfer of assets across generations while maintaining a certain level of control. In this comprehensive guide, we provide an overview of the crucial factors to consider when adopting this approach to your succession planning strategy.
Establishing a Family Investment Company (FIC) provides the opportunity to transfer cash or assets into the company, enabling the inheritance tax-free passage of wealth (subject to a 7-year period). Moreover, retaining control over the assets during your lifetime is an added benefit.
Companies also present a more favourable tax environment for the growth assets. As a result, this method is frequently recommended to clients with substantial property portfolios, as it offers enhanced tax efficiency.
Setting Up a Family Investment Company
The planning structure and strategy of a family investment company (FIC) will vary which depends on the circumstances of the owner and founder(s).
However, setting up a FIC will include the following considerations:
a. The introduction of assets in FIC
The founder and owner of the Family Investment Company will usually either gift the assets or loan assets to the FIC, but this depends on the nature of those available assets and any tax implications on the transfer.
In these cases, anyone who plans to set up a family trust will need to take into consideration how much they will be investing in the company and what types of assets the FIC itself will invest in, and whether these are already existing assets or new assets. This could be anything from Bonds, property, equity securities, Jewellery, artwork, and even classic cars.
b. The Nature and Types of Company
The major difference is that the unlimited companies are not required to make the filing of accounts at Companies House which helps to retain privacy over the family’s personal wealth.
Major consideration should be given as to whether the Family Investment Company is set up as a limited company or an unlimited company.
On the other hand, unlimited companies do not have any benefit of limited liability for the shareholders, which is a major issue if the Family Investment Company goes on to make investments in trading businesses or making the disposal of assets in the future.
c. The different classes of shares
The types and class of shares to be issued by the FIC to the founder(s) and the member of their family, and whether any voting rights are attached to them, will be one of the major considerations while setting up a Family Investment Company.
The type and nature of share distribution help to determine not only the level of control that everyone can exercise over the company but also the distribution of income and assets. The major idea is usually that the value and benefit arising from the growth of assets held in the Family Investment Company are passed to future generations rather than retained by the owners and founders, which helps to minimise exposure to IHT.
If you’re considering setting up a Family Investment Company, our Family Investment Company Services can provide the expert guidance you need.
Managing a Family Investment Company
whereas the rest of the other shareholders cannot usually make decisions in daily company affairs and about investment strategy or the payment and timing of any dividends, but they will be benefitted financially.
The company, under the control of the owners or founder(s), will acquire assets that will generate a return. Income earned can either be re-invested within the company or used to repay the loan of a founder, but any underlying capital value grows in the name of future generations.
However, the way in which a Family Investment Company is managed, both strategically and on a day-to-day operational level, will mainly depend on the articles of association and shareholders agreements drawn up for the said company. Since these are often done to the individual needs of the founder and their family members, the variations involved will be potentially vast.
Typical Structures of FICs
A typical example of a FIC could be as follows:
The parents generally provide funds to the Family Investment Company in the form of either interest-free loans or by subscribing for preference shares. This will not be treated as a transfer of value for inheritance tax (IHT) purposes, and most importantly these funds can easily be extracted from this FIC later tax-free.
The parents also subscribe to voting shares in the Family Investment Company, which will give them control of the company at the shareholder as well as board level.
The parents could also subscribe to a class (or classes) of non-voting shares. The parents then have an option to give non-voting shares to their children (preferably before significant value accrues to those shares). The gift at that point of time will not be subject to Inheritance Tax, provided those parents will survive for seven years from the date of that gift. The non-voting shares of those FIC may pay dividends in the future.
The parents also have the option to put funds into a discretionary trust solely for the benefit of their children without triggering an IHT charge, to the extent that their annual exemptions and IHT nil rate bands are available. The parents should be irrevocably excluded from benefiting from this trust. The trustees then subscribe for a class of non-voting shares in the Family Investment Company at market value, i.e., at nominal value if the company is being newly created.
Conclusion
Setting up and managing a family investment company can be a highly beneficial strategy for long-term wealth preservation and growth.
By consolidating family assets and leveraging collective expertise, a family investment company provides a structured and efficient approach to managing wealth across generations. With careful planning, education, and a long-term perspective, a family investment company can be a powerful tool for long-term wealth preservation and growth.
UK Property Accountant’s ongoing tax management services contribute to the long-term success of the FIC by providing expert guidance and ensuring continued compliance with changing tax requirements.
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