Family Investment Companies
A Family Investment Company (FIC) is a tax-efficient structure used by families to manage and grow their wealth. At its basic level, it is simply a private limited company except instead of being a trading business it is designed to hold and invest family assets.
An FIC allows parents or grandparents to keep control over assets while enabling tax-efficient succession planning for future generations. It is often used as an alternative to trusts.
How does a Family Investment Company work?
An FIC is set up like any other company, with shares allocated among family members. The founding family members typically act as directors, controlling investment decisions and the wider management, whilst younger generations may hold shares but have limited control. The company’s income, whether from interest or capital growth, is subject to corporation tax rather than personal income tax. There is usually no corporation tax on dividend income they receive from other companies.
The company is set up at creation with a range of ‘alphabet’ shares’ which allow more granular control and distribution of assets and income to the wider family.
The company can invest in a broad range of assets, including:
- Stocks & shares
- Bonds
- Investment funds
- Property
- Private equity
Each have their own considerations around suitability inside the structure with some being more tax advantageous than others.
Key financial planning considerations
Tax efficiency
One of the biggest advantages of an FIC is its tax treatment. Unlike personal income tax rates, which reach 45% for additional rate payers (or higher in some instances), a FIC pays corporation tax on profits which currently has a top level of 25%. This allows wealth to accumulate more efficiently. Additionally, dividends received from UK and many overseas companies are often exempt from corporation tax, providing further tax benefits.
Inheritance Tax (IHT) planning
FICs are commonly used for IHT planning. Founders can transfer shares to younger generations, reducing the value of their estate for IHT purposes while keeping control as directors. However, gifts of shares could trigger immediate Capital Gains Tax (CGT) liabilities, requiring careful structuring to avoid unnecessary tax liabilities.
Control and governance
One of the main reasons wealthy families opt for an FIC over a trust is the ability to keep control. The company’s Articles of Association and Shareholders’ Agreement can dictate voting rights, dividend policies, and share transfer restrictions. This ensures that wealth stays within the family while allowing the next generation to benefit over time.
Costs and administration
FICs must follow company reporting requirements, such as filing annual accounts, and maintain proper governance. Whilst the tax advantages can be significant, the administrative burden and professional fees should be factored into the decision-making process.
In summary
FICs can be effective tools for tax-efficient management and accumulation of wealth, including inheritance planning. However, setting up and maintaining an FIC requires careful planning, particularly on the tax implications and company structure, to ensure they meet the family’s long-term goals. Seeking professional legal, accountancy and financial advice is crucial to ensure it aligns with your family’s financial goals.
Please get in touch to book a free initial discussion with a qualified financial planner.
Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.
