In recent years, “Family Investment Companies” (FICs) have become more widely used in family tax planning exercises. However, they are not a new structure by any means – our oldest FIC client is over 100 years old!
They are setup and operate similarly to any other company, but own investments (e.g. stocks and shares or property) rather than trading assets and have investment income rather than trading income.
HOW TO FUND A FIC?
There are essentially 2 ways to fund a FIC – the funds can be introduced as a loan or as share capital (or a combination thereof).
WHy set up a fic?
Following the changes introduced in 2006, an individual is limited to the amount that can be put into a Trust without incurring an up-front Inheritance Tax (IHT) charge, whereas there are usually no up-front IHT charges with setting up a FIC provided it is structured correctly. Trusts can however be used alongside FICs to achieve combined benefits.
Still considering IHT, the value of any personally held shares in a FIC will remain in your estate. However, with careful structuring, it is possible to include other family members or Trusts as shareholders and therefore, future growth can be split amongst the shareholders thus reducing or avoiding further growth in the value of your estate.
In addition, if the funds are introduced to the FIC as loans, these loans can be withdrawn or repaid to you at any time tax free, or gifted to the next generation as part of your overall IHT strategy.
The income and gains of a FIC are taxable at the Corporation Tax rate, which is currently 25% for these companies, compared with the personal tax rates of up to 45%. Moreover, it is worth noting that unlike the position for individuals, dividend income is generally not taxable income within a FIC, albeit with a few exceptions.
Unlike individuals, FICs can deduct most costs associated with running the company and investments therein, when calculating its tax liability. This includes investment management charges and other professional fees, and can also include directors’ remuneration such as pension contributions or the acquisition of company cars (electric cars can be particularly tax-efficient). By virtue of paying less tax, a FIC may have more net income available to reinvest meaning that the overall value of the FIC can grow faster than a similar portfolio of investments held by an individual.
THE DOWNSIDES TO SETTING UP A FIc
FICs should not be viewed as an off the shelf option, they are a bespoke structure that should be designed to suit the specific needs of your family. As such, there are both one-off set up costs and annual compliance costs associated with FICs, but as mentioned above, the annual costs are usually tax deductible and can be quickly recovered from the tax efficiencies achieved by this structure.
There can be a Capital Gains Tax (CGT) liability personally if existing personal investments are transferred into a FIC. This is because they are deemed to have been sold to the FIC at current market value. This would not be the case with a transfer of cash.
Once a FIC is set up, taxable gains can arise on unrealised profits for certain types of investment such as fixed interest holdings or bonds. However, most financial advisers are now familiar with FICs and can structure a portfolio with this in mind.
Where funds are distributed in excess of any loan repayments, there will be in theory a ‘double tax’ charge. This is because the FIC will have paid corporation tax on its profits and then any income for the individual will then be subject to income tax. That said, as FICs are created as a long-term structure, any distributions can be managed tax efficiently, for example: pension contributions from the FIC, benefits such as company cars, a salary up to the national insurance threshold, and dividends.
How we can help
We have been setting up and acting for multi-generational FICs for many years (as above, we act for some FICS that were established long before a lot of our team members were born!). This puts us in a strong position to support you through the process of establishing and managing your own FIC. Our experience also means you can be confident that you will have the right structure for you.
If you are interested in understanding how a FIC could be beneficial for your circumstances, please do not hesitate to contact Emily Robson, Steve Roberts or a member of our Private Client team.