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Could you benefit from a family investment company (FIC)?

Nov 17, 2023 | Uncategorised

Family investment companies (FICs) are designed to transfer wealth down the generations. In this respect, they’re a little like trusts – but they’re set up, and operated, differently.

In this article we break down the basics of FICs and whether they could form part of your inheritance tax planning.

But before we do, it’s important to say that this article doesn’t constitute financial advice – it’s intended just as a guide to the broad issues. No decision relating to FICs should be taken without sound financial advice.

What is an FIC?

An FIC is a UK-resident private company whose shareholders consist of family members. They’re set up by parents or grandparents in order to transfer wealth down the family line. As a general rule, they’re companies that invest rather than trade.

Although there’s no strict legal definition of an FIC, they’re similar to other limited companies once set up – the difference is in how they’re started.

Limited companies can be set up for a few hundred pounds by your accountant, and they follow standard Articles of Association – the rules of how the company should operate.

With an FIC, the rules allow things to run slightly differently. The Articles of Association can be tweaked to meet the needs of the family more exactly.

The founders – typically parents or grandparents – transfer cash, and in some cases property, into the company in exchange for shares and loans.

The founder then gifts shares of the company to younger family members. These gifts are exempt from inheritance tax (when following the “seven-year rule”) – and if the gift is made soon after the company is founded, it’s also exempt from capital gains tax.

In essence, then, the point of an FIC is to accumulate wealth and hand it down to the next generation with a minimal tax burden.

What is an entrenched directorship?

An entrenched directorship allows the FIC’s director to remain in their position for the rest of their life – regardless of whether they own the company’s capital shares. They control the company’s assets and dividends.

What is HMRC’s view?

An HMRC research group was set up to investigate FICs, but disbanded in August 2021 when “there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours”.

Some point to a double standard where HMRC disapproves of so-called “alphabet shares” – which can lead to tax avoidance – in relation to open companies but not in a closed FIC.

Can you put property into an FIC?

Yes, property can be put into an FIC along with cash. However, there can be complications arising from stamp duty and capital gains tax – so it’s worth getting thorough financial advice before proceeding.

How is an FIC different from a trust?

A trust is a legal vehicle – a financial product that’s a bit like an old-fashioned safe. The settlor appoints trustees to administer it on their behalf.

By contrast, an FIC is a company that holds a family’s investments. The shares and loans that it holds are gifted by the older generation to the younger.

Both exist to transfer wealth from one generation to the next but they operate in different ways.

How is an FIC taxed?

The simple answer is that it’s complicated. Before setting up an FIC, you’ll inevitably seek financial advice and explore the tax implications at length.

But the basics are as follows. FICs are tax efficient with regard to inheritance tax – “efficient” in this case meaning you pay little or none of it.

An FIC will pay corporate tax at the main rate of 25% if its annual profits exceed £250,000.

Capital gains are chargeable to corporation tax – but at a lower rate than if they were payable by an individual.

There’s no tax payable on UK (and most overseas) dividends that are received by the FIC.

Finally, there’s income tax. Pension contributions and salaries paid to directors all pay income tax once the £12,500 personal allowance has been used up.

This is by no means an exhaustive account of an FIC’s tax implications. Inheritance tax is a complicated proposition and FICs are no exception.

Who should set up an FIC?

The point of an FIC is to accumulate wealth over the long term. They provide ample opportunities for tax savings. Dividends received are tax-free and income can accumulate without immediate taxation. Moreover, profits have lower corporation tax rates than if they were personally held or in a trust.

Another possible advantage is that the FIC’s corporate structure means that assets aren’t divided in the event of a divorce. The wealth is transferred through the bloodline and isn’t split between spouses – so family courts can’t seize company assets when a divorce occurs.

FICs allow for detailed succession planning and continued control over assets. The purpose is to preserve – so they only apply to couples with substantial amounts of cash (and other assets) to protect.

That said, it costs money to run an FIC – and the amounts involved aren’t insubstantial. FICs can also sometimes create conflicts between family members and the reporting requirements can lead to a sense of exposure.

Conclusion

Setting up an FIC can allow for assets and income to grow down the generations while reducing tax liabilities – particularly inheritance tax.

Because the point is wealth accumulation, FICs are the preserve of people with substantial assets. If this applies to you, you might want to consider setting one up as an alternative to – or alongside – a trust.

Are you looking for legal support related to wills, trusts or probate? At Milners, we have a team of experienced inheritance lawyers who can help you make arrangements that support you and your family and protect your wealth. Get in touch today for a free, no-obligation consultation.

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