How And Why Are Family Investment Companies Used In The UK
Family Investment Companies (FICs) have become an effective vehicle in the UK for passing wealth to the next generation while maintaining control over assets. The following is a brief overview of how they function and why they are often used:
How Family Investment Companies Work
A Family Investment Company is a private company, typically limited by shares, which is set up to hold and manage family wealth. The typical structure involves parents or older generations acting as directors and initial shareholders, while younger generations can be brought in as shareholders, either immediately or gradually over time.
Steps Involved in Setting Up an FIC:
- Formation and Funding: The company is incorporated and funded, typically by the parents, either through cash contributions or the transfer of existing assets.
- Share Structure: The company can have different classes of shares, enabling flexible distribution of dividends and control. For example, parents might retain voting shares, while non-voting shares can be allocated to children.
- Asset Management: The company invests in a variety of assets, such as property, stocks, or other investments, generating income and capital growth.
Key Features:
- Directors’ Control: The parents can retain control by acting as directors, making strategic decisions regarding the investments and operations of the company.
- Shareholder Rights: By distributing shares with different rights, the founders can control how income and capital are distributed to family members.
Why FICs Are Used for Passing Wealth
- Tax Efficiency:
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- Reduced Income Tax: Investment income and capital gains within a company are typically taxed at corporation tax rates, which have been historically lower than personal income tax rates for higher earners.
- Inheritance Tax (IHT) Planning: Transferring shares in an FIC can help mitigate IHT. Shares can be gifted gradually to the next generation, taking advantage of the seven-year rule, where gifts made more than seven years before death can fall outside the estate for IHT purposes.
- Dividend Distribution Control: Dividends can be distributed to shareholders (e.g., children who may have lower income tax rates) in a tax-efficient way.
- Control and Protection:
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- Maintaining Control: Founders can keep control over the assets and how they are managed through their roles as directors, even after gifting shares to children.
- Asset Protection: FICs can offer a layer of protection against risks such as divorce or creditors by structuring ownership and voting rights carefully.
- Flexibility in Wealth Distribution:
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- Custom Share Classes: Different share classes allow for tailored rights to dividends and capital, enabling the founders to control distributions and manage wealth according to the specific needs of family members.
- Long-Term Planning: The company structure can facilitate long-term wealth management, with assets staying within the family and under direct oversight.
Reasons for Popularity:
- Rising Inheritance Tax Concerns: Given the relatively high rates of IHT in the UK (40% above the nil-rate band), families seek to use structures that mitigate this tax burden.
- Lower Corporation Tax: The lower corporation tax rate compared to higher personal income tax and capital gains tax rates incentivizes the use of corporate structures.
- Flexibility and Asset Control: Unlike trusts, FICs offer more flexible and direct control over assets, allowing parents to retain decision-making power over significant investments.
Practical Considerations:
- Legal and Tax Advice: Setting up an FIC involves complex legal and tax planning. Professional advice is essential to ensure the structure complies with UK tax law and maximizes tax efficiency.
- Ongoing Compliance: Directors must meet the statutory obligations of running a company, including filing annual accounts and tax returns.
In summary, Family Investment Companies provide a mechanism for transferring wealth while maintaining control, achieving tax efficiency, and protecting family assets. They are an increasingly popular alternative to traditional trust structures in the UK.
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.
