Family Investment Companies – are they a good idea?
Wednesday 13th October 2021
In simple terms a family investment company (FIC) is a company that invests rather than trades, and as the name implies, they are usually held within a family. They may be used as a way of passing wealth down through the family to younger generations and can bring a variety of tax advantages.
In the past, it was common for individuals to use trusts to provide for their descendants, and there were special kinds of trusts which allowed them to do this without any immediate tax charge, and almost without restriction on the amounts given away. However, in recent years, and in particular since 2006, the government has made it increasingly difficult for individuals to use trusts for significant sums, so they are faced with either making outright gifts to young people, or seeking alternative arrangements. Enter the FIC.
The FIC is set up by an individual (the founder) transferring cash or assets to the company, usually by way of a loan, in exchange for a share or shares. Other family members, and possibly a family trust, are then brought in as additional shareholders and different classes of share may be issued to enable flexibility around payment of dividends.
Any profits arising from the investments are taxed at corporation tax rates rather than income or capital gains rates, which are usually higher.
The founder shareholder generally retains control over the investments (or appoints an adviser) and the payment of dividends. The company documents can be drafted to protect the shares from sale outside of the family, making this type of structure effective in a divorce.
This is a complex subject, and far too wide to be covered in this brief note, but importantly, there has been a slight shadow over FICs in recent years which appears now to have lifted. In 2019 a special team was set up by HMRC to investigate their use, and there was a fear that they may come under attack. However, that team has now been disbanded, after finding no evidence of abuse, so it seems that FICs are here to stay for the foreseeable future.
If you would like to know more about FICs or would discuss all options available when planning for the future, please contact Diana or Greg below.