The Main Legal Considerations When Setting Up A Family Investment Company
When setting up a Family Investment Company (FIC) in the UK, there are several key legal considerations to take into account to ensure that the structure is compliant and effective for wealth planning.
- Corporate Structure and Articles of Association
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- Customisation: The FIC should be structured with customized Articles of Association that outline the specific rights attached to different classes of shares. This allows for tailored distribution of voting rights and dividend rights among family members.
- Share Classes: Having different classes of shares (e.g., voting and non-voting shares) enables the founders to retain control while gradually involving younger generations.
- Director Roles: The Articles should clarify the roles and powers of directors, often allowing founders to maintain decision-making authority even if shares are transferred.
- Shareholder Agreements
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- Governance: A shareholder agreement is essential to establish rules for the operation of the company and to manage potential disputes between shareholders. This can include decision-making processes, dividend policies, and conditions for the transfer of shares. Note that the shareholders agreement remains a private document, whereas articles of association are publicly available at Companies House.
- Family Protections: Provisions can be included to protect against external claims (e.g., divorce or creditor claims) by stipulating that shares must stay within the family or have pre-emptive rights attached.
- Tax Implications
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- Corporation Tax: The company will be subject to corporation tax on its profits, which may be advantageous as corporation tax rates are typically lower than higher personal income tax rates.
- Capital Gains Tax (CGT): Transfers of assets into the FIC may trigger CGT. Consideration should be given to any reliefs available, such as business asset disposal relief, where applicable.
- Inheritance Tax (IHT): The transfer of shares in the FIC to family members can have implications for IHT. The use of the seven-year rule is crucial for gifts to fall outside of the donor’s estate for IHT purposes if they survive for seven years after the gift.
- Dividends and Income Tax: Dividends paid out to shareholders will be taxed as personal income. The shareholding structure can be designed to optimize tax efficiency, particularly by allocating shares to family members in lower tax bands.
- Regulatory Compliance
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- Company Registration: The FIC must be registered with Companies House, complying with all filing and reporting obligations, including annual financial statements and confirmation statements.
- Director Duties: Directors of the FIC must adhere to the statutory duties set out in the Companies Act 2006, including acting in the best interests of the company and avoiding conflicts of interest.
- Financial Reporting: Accurate record-keeping and financial reporting are mandatory, and any distributions or significant financial decisions must be documented according to legal standards.
- Legal Documentation and Structuring
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- Funding the Company: The method of funding (whether through cash, asset transfer, or loan) should be carefully considered to avoid immediate tax charges. Loans can be structured as interest-bearing to provide a steady income stream for the founders.
- Trust vs. FIC: When deciding between using an FIC and a family trust, legal and tax implications should be weighed, as FICs provide more flexibility and control but may have different tax treatment compared to trusts.
- Professional Advice
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- Legal and Tax Advisors: Engaging experienced legal and tax advisors is vital to navigate the complex regulations and tailor the FIC to the family’s specific needs and goals.
- Regular Reviews: Ongoing professional reviews ensure that the structure remains effective as laws and the family’s circumstances change.
These legal considerations are crucial for ensuring that the FIC is established correctly, offers tax efficiency, maintains control, and achieves long-term wealth management objectives.
How we can help
If you require help with setting up a Family Investment Company (FIC) in the UK or require any advice, we offer a no-cost, no-obligation 20-minute introductory call as a starting point and in some cases where appropriate, a fixed fee appointment.
Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.
