In today’s world, families are constantly seeking smart and efficient ways to manage and grow their wealth. One increasingly popular option is the Family Investment Company (FIC). But what exactly is a Family Investment Company, and why might it be the right choice for you? Let’s break it down in simple terms.
What is a Family Investment Company?
A Family Investment Company is a private limited company, incorporated under the Companies Act 2006 which is created to hold and manage family investments, and potentially transfer it to future generations through shares in the company.
It is set up by founders (usually parents), transferring cash or assets, typically by way of a loan/gift. Gifting of assets such as property may trigger Capital Gains Tax and/or Stamp Duty Land Tax.
Key Benefits of a Family Investment Company
Tax Efficiency
One of the primary advantages of a FIC is the potential for significant tax savings. Here’s how:
- Corporation Tax Rates: FICs are subject to corporation tax on their profits, which is lower than personal income tax rates.
A FIC will pay corporation tax at 25% (effective 1 April 2023) on annual profits exceeding £250,000. Small profit rate of 19% will apply where annual profits are below £50,000. Where a FIC’s profit falls between £250,000 and £50,000, marginal relief provisions will apply.
However, the small profits rate will not apply to ‘close investment holding companies’ which include FICs primarily holding stocks and shares, but do not include property investment companies.
Corporation tax rates are significantly lower than the top rates of income tax (currently 40% and 45%) and therefore may result in higher post-tax profits being available for reinvestment. - Tax Relief on Interest: A FIC will be able to claim corporation tax relief for interest on loans, where the loans are used for the purposes of the company’s business (e.g. acquiring new shares or property or generally managing its business).
Individuals, however, do not receive tax relief on interest on loans to acquire shares, but they receive a 20% tax credit on loans to purchase property. - Dividends: Dividends received by the FIC are exempt from corporation tax, which can lead to more efficient growth of your investments. However, there is tax payable on dividends paid by the FIC.
- Inheritance Tax Planning: A gift of shares to children would be a potentially exempt transfer for IHT, meaning the value of the gift would fall out of the founder’s estate for IHT purposes, provided they survive at least seven years after gifting the shares.
Control and Flexibility
A FIC allows the founders (typically parents) to retain control over the assets and investment decisions, even while gradually passing ownership to the next generation. This is achieved through different classes of shares with varying voting rights.
- Founder Control: Parents can hold voting shares, allowing them to make key decisions regarding the company’s investments and management.
- Family Involvement: Non-voting shares can be distributed among children or other family members, enabling them to benefit from the company’s success without influencing its day-to-day operations.
Asset Protection
Assets held within a FIC are generally better protected from personal liabilities. This means that personal financial difficulties faced by individual family members are less likely to affect the assets held by the FIC.
- Creditors: The assets are shielded from creditors in the event of bankruptcy or financial trouble of an individual shareholder.
- Marital Breakdown: In the case of divorce, assets held by the FIC are often more secure, as they are owned by the company rather than the individual.
How to Set Up a Family Investment Company
Setting up a FIC involves several steps, including:
- Incorporation: Registering the company with Companies House.
- Share Structure: Deciding on the types of shares and their distribution among family members.
- Funding: Transferring existing investments or cash into the FIC.
- Governance: Establishing the company’s articles of association and appointing directors.
It’s important to seek professional advice during this process to ensure that the FIC is set up correctly and in the most tax-efficient manner.
Conclusion
A Family Investment Company can be a powerful tool for managing and growing family wealth, offering tax efficiencies, control, and asset protection. While it may not be suitable for every family, it’s certainly worth considering as part of a comprehensive wealth management strategy.
Are you ready to explore how a Family Investment Company could benefit your family’s financial future? Get in touch with our experienced tax advisor today. Please click here to book a consultation.
Disclaimer: This blog is accurate as of the publication date and is intended for general informational purposes only. It does not constitute legal or professional advice. Please seek independent professional advice.