Family Investment Companies (FICs) are growing in popularity as a tax-efficient way to hold, control, and pass on family assets.
Each FIC is bespoke, holding wealth which is surplus to the everyday needs of the company’s founder and their family.
The FIC incurs no upfront inheritance tax, yet the founder retains complete control of investments and dividends, and there is no restriction on how much can be held in the company. That makes it an attractive alternative to trusts.
As long as the founder uses cash to subscribe for the company’s shares, there are no immediate tax consequences.
The founder initially becomes the sole director who holds all the voting shares. Non-voting shares, which carry rights to capital and income, can then be gifted to family members by the founder. The gift is treated as a potentially exempt transfer for inheritance tax purposes. Some transfers, however, would have capital gains or stamp tax implications.
There are other potential tax advantages. The FIC pays corporation tax on its income and capital gains generally, and most dividends are exempt from corporation tax.
Dividends to the family shareholders follow normal rules. For adult children, dividends from the FIC could be an efficient way to fund their higher education costs.
Alison Fernandes, Family Law Partner, says: “One of the added benefits of an FIC is the ability to include controls over what happens on divorce of children who are shareholders in the FIC. This is likely to be better than the controls which can be placed over a trust, which many wealthy clients have used historically, and over which Family Courts can have wide-reaching variation powers on divorce.”
If shares in the FIC are gifted to a son or daughter-in-law for tax purposes, a shareholder agreement can be put in place to regulate the buyback or transfer of those shares in the event of marital breakdown. Alison says: “We can’t always ring-fence the shareholding and exclude it from being taken into account on divorce, but the fact that the asset and income stream come from one spouse’s family mean that it will normally be treated differently from matrimonial assets which are often divided equally.”
Ideally, pre-nuptial or post-nuptial agreements would be put in place alongside the FIC to help protect the shares. Such agreements now hold far more weight than they used to following the Supreme Court decision in Radmacher v Granatino in 2010. However, where this is not palatable a shareholder agreement can at least provide for shares to be retained by the founder’s family in the event of divorce, and a mechanism can be set out for valuation of the shares.
The FIC is flexible. Control can be handed over gradually, through share transfers and/or the appointment of other family members as directors. The founder protects his assets, limits his liability, and is passing on the maximum value of those assets to the next generation.
There are some (though not necessarily substantial) costs and administration associated with a limited company. Unlike a trust, the FIC is subject to the Companies Act, so its accounts are open for public inspection. There is also the potential hazard of double taxation. For instance, the company may pay tax on a gain and the founder may then also be taxed by taking it out as a dividend. Finally, there is always the risk of changes to tax rules.
FICs have undoubted attractions, but specialist legal and tax advice is essential. With IM Private Wealth, there is no need to bring in external accountants for the provision of tax advice, as all of the expertise is in-house.
Download our guide on FICs
Seminar - The Private Wealth and Corporate teams will be holding a seminar on the creation of FICs in our Sheffield office on 16 March 2018. See here for more details.
Published: 22 February 2018
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