If you’re looking for a way to manage your wealth, reduce inheritance tax, and protect your assets, a Family Investment Company (FIC) might be a useful tool. FICs are becoming increasingly popular, especially among individuals with significant wealth, and they can provide flexibility and tax efficiency. In this guide, we’ll explore what FICs are, how they work, and the benefits and drawbacks they offer.
What is a Family Investment Company?
A Family Investment Company (FIC) is a private company designed to manage and protect your wealth. It allows you to pass assets on to your heirs while minimizing inheritance tax (IHT) and retaining control. A FIC can hold various types of assets, including investments, cash, and property, much like what you would hold in an ISA or pension.
Typically, a FIC is best suited for those with significant wealth, generally around £2 million or more. For smaller amounts, the setup and ongoing costs may not justify the benefits. These companies are more commonly used by individuals or families with multi-million-pound estates.
Key Advantages of a Family Investment Company
Maintaining Control Over Your Wealth
One of the key benefits of a FIC is the ability to separate control from financial benefits through the creation of different types of shares. These shares, often referred to as “alphabet shares,” allow for flexibility:
- Type A shares: These shares can carry voting rights, enabling the shareholder to make decisions for the company. However, they typically don’t provide any benefits related to the company’s profits or growth.
- Type B shares: These shares grant the holder access to profits and investment growth, but without control over the company’s operations.
This structure ensures that those with Type A shares (typically parents) retain control over decision-making while enabling other family members to benefit financially.
Protection from Divorce and Creditors
A FIC can be structured to prevent shares from being transferred to non-family members, which helps protect the company’s wealth in the event of divorce or bankruptcy. This ensures that your wealth stays within the family.
Minimizing Inheritance Tax
FICs are a powerful tool for reducing inheritance tax. When you fund the FIC through a director’s loan, the loan is not counted as an asset on the company’s balance sheet, thus reducing its value for IHT purposes. If you later gift shares in the FIC to your children, those shares may have little to no value initially, meaning there’s no IHT liability at the time of the gift. The shares will also be excluded from your estate, so any future growth is free from IHT.
However, it’s important to note that when the FIC shares are eventually inherited, the value may be subject to Capital Gains Tax (CGT), which is typically taxed at a lower rate (24%) than IHT (40%). Effective planning, including repaying or writing off the loan before death, can help mitigate this issue.
Tax-Free Withdrawals
Funding a FIC via a loan allows you to access the original capital tax-free through loan repayments. This provides a tax-efficient way to supplement your income while avoiding the 20% entry charge that trusts incur for assets above the £325,000 nil rate band.
Greater Tax Efficiency
A FIC offers several tax advantages. The company is taxed at a corporate rate of 25% on profits, which is generally lower than individual income tax rates. Also, CGT does not apply to the investments held within the FIC. Dividends from UK investments are often exempt from corporation tax, and allowable business expenses, such as investment management fees, can be deducted from profits.
When dividends are paid to shareholders, they are subject to income tax at the individual’s marginal rate, with a £500 tax-free dividend allowance. For family members in lower tax brackets, this could result in a tax rate as low as 8.75%.
Charitable Giving
A FIC can also incorporate charitable giving, allowing you to donate a portion of the company’s profits or invest in ethical projects. These donations are treated as business expenses, reducing the company’s overall tax liability.
Disadvantages of a Family Investment Company
Additional Costs and Complexity
Setting up and maintaining a FIC comes with additional professional and regulatory costs. You’ll need to file accounts with HMRC and may incur accountancy fees for both initial setup and ongoing administration. These costs should be weighed against the potential benefits.
Potential Double Taxation
While the company pays tax on its profits, shareholders also pay tax on any dividends they receive. This double taxation can reduce the overall efficiency of the structure. However, by distributing profits to family members in lower tax bands and utilizing individual allowances, the impact of double taxation can be minimized.
Tax Implications of Asset Transfers
Transferring non-cash assets, such as property, into a FIC may trigger CGT and other tax consequences. It’s typically more straightforward and tax-efficient to transfer cash assets into a FIC.
Setting Up a Family Investment Company
Establishing a FIC requires careful planning and consideration of your specific financial situation, as well as expert advice. A qualified financial planner and a Chartered Tax Adviser are essential to guide you through the process and ensure the structure meets your needs.
FICs offer significant advantages for wealth protection and tax efficiency, but they’re complex and may not be the right solution for everyone. They are particularly useful for individuals or families with substantial wealth looking to pass on assets efficiently while maintaining control.
Conclusion
A Family Investment Company can provide a tax-efficient and flexible way to manage and protect your wealth. While they offer many advantages, they also come with certain complexities and costs. If you’re considering setting up a FIC, it’s crucial to consult with a financial advisor to ensure it aligns with your overall financial goals and offers the best long-term benefits for you and your family.
