Family investment companies (FICs) have become a bit of a buzzword in tax over the last few years. As a concept, they are not new – Sagars act for some FICs that we established long before a lot of our team members were born (that really is no exaggeration). However, their popularity has increased recently, particularly since the Trust regime became a lot less favourable a number of years ago.
What is a Family Investment Company?
As the name suggests, a FIC is company that is usually owned by family members to hold investments. The investments can vary – quoted stocks and shares are popular, as is property, but the key is that the FIC holds generally passive investments that do not therefore qualify for any of the trading business reliefs like business asset disposal relief for capital gains tax, or business relief for inheritance tax. Instead of individuals paying income tax on the investment returns at up to 45%, the company pays corporation tax at 19% and there is a choice as to whether any income is distributed out triggering dividend tax on the recipients.
FICs are often used as part of a wider family tax planning exercise, for example parents set up a FIC and put in a sum of money which is invested as preferred to generate a return. The beauty of a FIC structure is the flexibility and choice around shareholdings; parents can retain a degree of control without necessarily having many shares or Trusts can be created as shareholders with children and other family members having shares. As there is no fixed structure with FICs, one of the main challenges is deciding how to set them up, but they can be tailored to suit and achieve a range of family goals.
Structuring FICs to achieve family goals
Tax naturally influences decisions about which structure to use, and this is usually where we initially come in. We can help with income tax planning, for example adult children who are at university could be paid dividends and utilise their tax allowances so that parents are not funding them out of their own tax paid cash. Inheritance tax planning is another consideration which is where using Trusts can come into play too.
In our experience however, a key goal when FIC planning is to ensure asset protection over the generations. Because the FIC owns the assets, future beneficiaries are prevented from selling off the family silver, the company directors have a say in what goes on and they dictate the paying out of dividends. Again, the use of Trusts is popular because this can help to reduce the loss of family wealth if for example a child makes a bad marriage and goes through a costly divorce.
As with most things in life, there are plusses and minuses to consider. The main downside to a FIC is that there are both set-up and annual administration costs but, in most cases, it will be worthwhile spending some time and money getting this bit right as it will literally pay dividends later. As I mentioned earlier, a FIC is not an off the shelf option, it is a bespoke structure that should be designed to suit the specific needs of your family.
How we can help
We’ve been setting up and acting for multi-generational FICs for many years, which puts us in a strong position to support you through the process of establishing your own. Our experience also means you can be confident that you will have the right structure for you. If you would like to understand more about how a FIC could work for you and your family, just get in touch with Kate Naylor by email or call 0113 297 6825.