Should you set up a Family Investment Company (FIC) for estate planning purposes?

What is a Family Investment Company (FIC) and what are the benefits? Eamonn Daly, partner at Meridian Private Client LLP, explains the tax implications on setting up a FIC.

Family Investment Company FIC

What is a Family Investment Company (FIC) and what are its benefits?

A Family Investment Company (FIC) is essentially a company where the shareholders are family members of the founder.

The founder can pass substantial value out of their estate to be held in the FIC for the benefit of their family. The founder can then maintain some control over the assets.

The use of a FIC provides a measure of asset protection. The aim is to safeguard family wealth, such as from future generations using it unwisely or losing it through divorce or insolvency.

Trusts are also used to achieve separation of value for the family from control, which for trusts is in the hands of the trustees. However, large value transfers to trusts result in an initial inheritance tax (IHT) charge. IHT does not arise on direct transfers to set up FICs. 

What protections for family wealth are there within a Family Investment Company (FIC)?

The value of the shareholders’ shares is reduced because they constitute a minority interest in the FIC and by restrictions over the shareholders’ powers. Usually, the ability of a shareholder to transfer their shares is restricted.

The value of a shareholder’s total estate is therefore less than if they held the FIC assets directly. This decreases the amount potentially subject to claims and tax in the event of divorce, bankruptcy, and death. 

How are Family Investment Companies (FICs) set up and structured? 

With a FIC, a company structure bespoke to the family’s circumstances is created. The required documentation will include a company memorandum and articles of association and a shareholders’ agreement. Like any other company, FICs have filing obligations and are registered at Companies House.

The family shareholders will hold different classes and types of shares with various rights.

Control, over investment decisions and distributions to the shareholders for example, is exercised by the founder. This is achieved through their position as a director or by retaining voting shares. Though, it should be noted that voting shares are valuable assets subject to IHT in the founder’s estate, even if they provide no economic interest in the FIC.

In some FIC structures, the founder will retain a financial interest and may even lend funds to the company allowing the tax-free extraction of profits via repayment of the loan. The outstanding loan is an asset of the founder’s estate for IHT, but any growth accrues to the family’s shares.

What are the tax implications on setting up a Family Investment Company (FIC)?

Gifts by the founder to set up a FIC will not suffer an IHT charge at all if the founder survives for 7 years. If the founder does not survive 7 years, only the value at the time of the gift is chargeable to IHT. Any growth in the value of the family’s shares is not included in the calculation of the founder’s IHT liability.

Any gains showing on non-cash assets given away to provide funds to a FIC can be chargeable to Capital Gains Tax at up to 28 per cent.

The FIC itself could incur a stamp duty or stamp duty land tax charge if other shares or property were used to subscribe for shares in it.

What is the tax treatment during the lifetime of a Family Investment Company (FIC)?

Income received and gains made within companies, including FICs, are charged at corporation tax rates. These are 0 per cent on dividends received from other companies and 19 per cent (25 per cent from 2023/24) on other income and gains.

These corporate tax rates compare favourably with those for individuals and trusts. As with any company, FICs therefore allow long-term tax-favoured accumulation of funds within them.

Any dividends paid by a FIC are taxable on the shareholders with the rate determined by their own tax position in the usual way. The directors can pay different dividend amounts on different classes of shares to take account of shareholders’ personal positions.

Shareholders often also hold redeemable preference shares which can be redeemed at the directors’ option. This enables capital to be paid to shareholders without tax consequences.

What is HMRC’s view of Family Investment Companies (FICs)?

Following concerns over lack of knowledge on how FICs are used, HMRC created a FIC unit in April 2019 to conduct risk reviews of them. However, in May 2021 HMRC confirmed that the unit had been disbanded. It had found no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours. Furthermore, it concluded that those using FICs were no more inclined towards taking steps for tax avoidance.

It was recognised that a FIC was a planning strategy, the primary purpose of which was to transfer wealth between generations and the mitigation of IHT.

HMRC advised that they now therefore look at FICs as ‘business as usual’ rather than having a separate dedicated team. The outcome appears to be that FICs will be assessed using normal principles and not specifically targeted for future investigations.

What are the disadvantages of a Family Investment Company (FIC)?

Detailed professional advice is required to ensure that FICs suit the family circumstances and meet the asset protection objectives tax efficiently. As a result, the set-up costs are relatively high and FICs are unlikely to be an option unless the assets being transferred are worth at least £2 million.

Any sum can be transferred to a FIC without an immediate IHT charge, compared to the limit of £325,000 for most trusts. A trust can also suffer IHT charges every ten years and on distributions of capital, though FICs are generally not as flexible as trusts. The shareholders are fixed at the outset, although often a trust is included as a shareholder to give more flexibility. Whilst FICs have lower tax rates than trusts on income and gains accumulated, it can be more difficult for directors to make large payments to shareholders without significant tax consequences.

Where FIC profits come from non-dividend income and gains and are paid out as a dividend taxable on the shareholders, there is an element of double taxation. FICs are not usually suitable if the plan is to make distributions to the family from an early stage.

About the author

Eamonn Daly is a partner at Meridian Private Client LLP, a Chartered Tax Adviser and a full member of the Society of Trust and Estate Practitioners (STEP).

See also

A guide to memorandum and articles of association

What to know about Capital Gains Tax

What are dividends?

What is Double Taxation Relief for inheritance tax?

Find out more

Memorandum and articles of association (GOV.UK)

Capital Gains Tax (GOV.UK)

Image: Getty Images

Publication date: 25 October 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.