Family Investment Company (FIC)

What is a Family Investment Company?

A Family Investment Company (FIC) is a UK resident private company whose shareholders are almost invariably entirely made up of family members. Typically they are set up by older generations wishing to protect family assets and transfer wealth to future generations. Such assets may eventually be seen as lifetime gifts, even though they still want to benefit from the income.

There is no legal definition of an FIC, and FICs are not subject to special rules of their own.

How does HMRC view FICs?

There was an HMRC research group tasked with investigating Family Investment Companies (FICs). However in August 2021 the group was disbanded. The unit reported that its work had come to an end, concluding that:

there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours”.

Following the disbandment of the group, HMRC will view FICs as part of ‘business as usual,’ which is very welcome news for families.

How does a Family Investment Company work?

Typically the founders transfer cash into the company in exchange for a combination of shares and loans.

Non-cash assets such as property can be also transferred into the company but this may trigger stamp duty land tax or capital gains tax liabilities for the transferror.

The founder can then gift shares of the company to other family members as a potentially exempt transfer. There would be no inheritance tax consequences on the donor if they survive seven years following the date of the gift. Assuming that the gift occurs soon after creation of the company then there are no capital gains tax concerns for the donor.

How does a FIC protect family wealth?

They are typically used to spread wealth throughout the family or as inheritance tax efficient vehicles. As they are structured around UK companies, the foundations on which they are built are well understood, easy to implement and have low annual compliance costs.

Assets are transferred into the FIC and those assets generate investment returns which can be used to provide family wealth. Alternatively, returns can be directed to be used for things such as payment of school fees.

Can I put property into a Family Investment Company?

There are existing tax advantages of holding property within a company structure, rather than personally so these advantages also apply to property within a FIC. Though care is needed to understand any other tax implications such as stamp duty, capital gains tax or the Annual Tax on Enveloped Dwellings.

Different classes of shares in FICs

The FIC structure makes it possible to have different classes of shares with different rights so that certain people have effective control of the company with different people receiving income.

Family Investment Company vs Trusts

A FIC can operate in a very similar way to a trust. A typical FIC will have the founding generation (akin to the settlor and trustees) retaining controlling rights over the assets that the company owns. Those controlling rights may be due to specific terms of the Articles of the company or due to rights attached to a class of share.

A typical trust will have beneficiaries who benefit from the income that the trust generates, who are different to the people who control the assets. The FIC will mirror this by issuing classes of shares with different income rights or different voting rights to different persons. This allows the income that the FIC generates to be distributed to those persons in accordance with the overall wishes of the family.

FICs and Family Businesses

Family business owners are comfortable with the processes and obligations associated with company activity. So using a FIC as part of the family’s estate planning may be more intuitive than using the trust equivalents.

How are FICs taxed?

Expert advice should be sought in all cases. The following is a high level summary of typical tax considerations.

Inheritance Tax on FICs

FICs are tax efficient when it comes to inheritance tax in a number of ways, provided the parents survive the usual seven year rule, though care needs to be taken as IHT conditions have been under review for some time and may be subject to change.

Corporation Tax on a FIC

A FIC with annual profits in excess of £250,000 will pay UK corporation tax which will increase from 19% to 25% from 1 April 2023. There will be a ‘small profits rate’ for companies where annual profits are below £50,000 which will be 19%.

For those companies with profits between £50,000 and £250,000 marginal relief provisions will apply to bridge the gap between the two rates.

Corporation Tax relief

The FIC may be able claim a corporation tax deduction for interest on loans taken out against the value of its investments, where the loans are used for the purposes of the company’s business. This offers an advantage over individuals who are not necessarily able to claim relief on interest on loans.

Capital gains tax and FICs

Appropriate planning can prevent any capital gains tax on setting up the FIC. The FIC will pay tax on any disposals it makes at the standard rate of corporation tax.

There is also an indexation allowance available to reduce the gain chargeable to tax on assets held before 1 January 2018.

The Substantial Shareholdings Exemption may also be available to exempt the gain on sale of trading subsidiaries, though complicated conditions apply.

Tax on FIC Dividends

Dividends received by the FIC could be tax free.

There is tax payable on dividends paid by the FIC. However, the first part of a dividend could be tax free and a follow on rate starting at 7.5% may make this less of a concern. Even the highest rate of dividend tax is lower than the 45% rate currently applied to trusts.

Advice must be sought regarding the tax position for a specific FICs including regarding withholding tax on overseas dividends.

What are the reporting requirements for a FIC?

As a FIC is based on a UK company there are Companies House filing requirements, including annual accounts which will be on public record. Public filings can possibly apply the reduced disclosure of abridged accounts (where permitted) or consideration may be given to using an unlimited, and not a limited, company.

How we can help

We are experienced in advising on which structure is best for your particular circumstances and will give a balanced opinion regarding FICs and trusts, as there are some personal circumstances where a trust may be more effective at asset protection.

Who we have helped

  • Enabled a family to separate assets between family branches using a FIC.
  • Helped a grandparent to transfer assets to grandchildren using a FIC in a case where one branch of the family had two grandchildren and another had more.
  • Advised a parent about how to set up various new businesses using a FIC.
  • Advised on a particular relief for non-domiciled individuals to benefit his adult children in the UK.

 

 
 
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