Family investment companies: all you need to know

Family investment companies are gaining popularity as a tax-efficient alternative to trusts to protect and transfer family wealth. These non-trading companies impose varied rights on family members, allowing for a more tailored approach to wealth transfer.

They can be utilised for business planning purposes, allowing excess funds in a trading firm to be lent, retaining important capital gains and inheritance tax reliefs. Additionally, clients utilise them to save for retirement, provide income for the next generation, and support school and university expenditures.

However, the flexibility provided by an FIC makes it an attractive choice for more entrepreneurial clients.

1. What is a family investment company?
2. Who is it suitable for?
3. What type of assets may an FIC hold?
4. Benefits of setting up an FIC
5. Tax considerations
6. HMRC views on FIC

What is a family investment company?

A family investment company (FIC) is a type of limited company in which the shares are held by various family members. Typically, each family member would own a distinct class of shares with specified share rights authorising them to certain income, capital, and voting rights at company meetings. A family investment company is a private company with family members as stockholders. It provides a flexible vehicle for family wealth management and enables tax-efficient profit growth and distribution among family members.

Who is it suitable for?

An FIC is ideal for anyone who meets the following criteria:

1. Those having substantial assets (which normally do not qualify for IHT relief, such as cash);
2. Those who are interested in investing in the long-term creation of wealth;
3. Those who are concerned about the way their wealth will be passed on to future generations; and/or
4. Those who wish to manage their investments via a corporate vehicle.

They'll want to do so in the most tax-efficient manner and usually want to retain some control over those assets, including some asset protection. Our clients come from various backgrounds, but many are entrepreneurs, landowners, property investors, and wealthy families.

Although our entrepreneurial clients are often familiar with the administrative needs of an FIC but after the modifications in trust administration over the last few years, The requirements are not all that dissimilar from one another.

What types of assets may an FIC hold?

An FIC may hold a variety of assets, including property and other tangible assets, investment portfolios, and cash. As the FIC collects funds through investment, that cash can be used for a variety of objectives. An FIC may choose to lend money to family members to assist them in establishing other businesses, or it may choose to invest directly in businesses or other assets.

Trusts are often incorporated into the design of an FIC. By establishing trust shares in an FIC, you can help create future tax efficiencies, such as by directing the money to younger generations who have little or no income of their own. This enables them to take advantage of their marginal rates while avoiding direct ownership of the shares.

Benefits of setting up FIC

An FIC can provide several estates and tax planning benefits for you and your family, including the following:

1. Preserve your wealth for future generations.
2. Power to control investment decisions.
3. Tax-efficient profit accumulation.
4. Protecting ones privacy is possible through shareholder agreements and family charters.
5. Income streams are flexible and under your control.
6. Businesses benefit from tax advantages on income, particularly when it comes to dividends and property investment.
7. FIC’s are less susceptible to variations in IHT and hence contribute to the development of a more assured estate planning strategy.
8. In comparison to trusts, you are restricted to your IHT nil rate band before paying IHT charges immediately.

While FIC’s are frequently used to pass on and increase family wealth, they can also be used for a variety of other purposes, including business succession planning, supporting the school and university fees, and retirement preparation.

Tax considerations

1. Corporation tax -

   Profits earned within the FIC are subject to corporation tax, which is presently 19 per cent. However, it is worth noting that this percentage will climb to 25% on 1 April 2023. Additionally, where the FIC invests in equity, there may be no tax because dividend distributions are often tax-free from company to company. This can dramatically boost the return on investment.

   This rate will be applicable to companies with annual profits of more than £250,000. A small profits rate of 19 percent will be implemented to protect businesses with yearly profits of less than £50,000 from the main rate adjustment. Where a company's profits fall between the upper and lower limits, marginal relief provisions apply to close the difference between the two rates. The small profit rate, on the other hand, will not apply to close investment holding companies, which by definition includes a large number of family investment companies.

   Additionally, profits generated by your investments will be taxed at the reduced corporation rate rather than the higher individual income tax rate.

2. Capital gains tax -

   Capital gains realised by a business are subject to corporation tax at a rate of 19 percent. At the moment, this is less than the individuals existing main rate of capital gains tax (CGT) of 20%. Additionally, for assets acquired prior to 1 January 2018, you will be provided with an indexation allowance to offset the tax liability on the gain.

   When shares in a subsidiary firm are disposed of, the gain can be exempt by the availability of the substantial shareholdings exemption. Conditions will apply in detail, but the FIC must generally own at least 10% of the company being disposed of, which must be a trading company. Until 1 April 2023, proceeds from the sale of investments can be reinvested in the company at a lower tax rate than an individual if he reinvested the proceeds from the sale of investments held in his own name. Not the case with the majority of FIC’s when the corporate tax rate will be increased from 19% to 25% on 1 April 2023.

3. Inheritance tax -

   Cash transfers to a family investment company are not subject to the initial charge of 20% inheritance tax. If the amount transferred to FIC exceeds the available nil rate of £325,000, the initial inheritance tax charge of 20% is waived off. This makes an FIC an attractive alternative for individuals who wish to transfer funds to their children above £325,000 while retaining control of that money.

4. Dividend tax -

   Family investment companies will not pay tax on received dividends, which means that it is well suited to holding share portfolios as the entire amount of dividend income received can be reinvested or used to repay any loans.

HMRC views on FIC

In April 2019, in response to concerns about a lack of knowledge about how FIC’s are utilised, HMRC established a FIC section to conduct risk assessments on them. However, HMRC revealed in May 2021 that the unit had been abolished. It discovered no evidence indicating a link between people who build a FIC structure and non-compliant behaviours. Additionally, study concluded that people who used FIC’s were no more likely to engage in tax evasion.

It was recognised that a FIC was a planning approach whose principal objective was the transfer of wealth to generations and the mitigation of IHT.

HMRC stated that they are now treating FIC's as business as usual rather than establishing a specialised team. As a result, it appears as though FIC’s will be evaluated with normal principles rather than being specifically targeted for further investigation.

How dns helps?

While there is no one-size-fits-all approach to set up an FIC, there are significant savings to be made when you find the appropriate structure. As with any tax planning technique, risks are involved, and an FIC should be considered part of a longer-term strategy. What is critical is that you consider an FIC as part of your overall family wealth planning. Our tax experts at dns accountants have extensive knowledge in this area and can assist you in developing a strategy to safeguard your wealth for you and your family.

If you have any questions regarding family investment companies, please speak to one of our dns experts right now on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.