Use Of Family Investment Companies As Part Of Succession Planning
Mike Bracegirdle, a Partner specialising in agricultural law, property and succession planning, looks at the opportunities for the use of Family Investment Companies for estate planning.
What is a Family Investment Company?
A Family Investment Company (FIC) is a tax efficient vehicle used for estate planning. It was developed following and in response to the changes in the taxation of trusts introduced in 2006. An FIC offers an alternative to trusts as they enable significant wealth to be passed to future generations whilst both protecting and retaining control over the assets.
An FIC is a UK-resident private limited company whose shareholders are family members. These are tax efficient when an individual transfers assets into a company, such assets can then be invested to generate income for the family.
Assets will normally be non-business related, ie cash, property, shares, artwork and even classic vehicles.
What are the benefits of a FIC?
- Cash transferred into an FIC is tax free. Note, the transfer of an asset into an FIC may attract CGT for the transferor, depending on the CGT position it would generally be more effective for the FIC to acquire assets itself funded by a loan.
- There is no immediate charge to Inheritance Tax (IHT) in relation to any gift made into the FIC provided that the donor of the gift survives 7 years from the date of the gift.
- The founder of the FIC retains control, allowing the founder to determine how the FIC gets the best returns for any investments it makes as well as who is entitled to receive any distribution from the FIC.
- Reduced tax liabilities. Profits are taxed at corporation rates up to 25% lower than in an individual’s name. Company expenses (advisor’s fees, interest loan repayments etc) reduce corporation tax. Capital gains on disposals fall as to corporation tax rates.
- Shareholders of the FIC only pay tax to the extent that the FIC makes any distribution to them. However if profits are retained in the FIC no further tax is payable.
The practical application of an FIC
- Parents form a company limited by shares. They retain one “A” share each.
- Each “A” shareholder has the right to appoint one director and the right to vote at general meetings, but they have no entitlement to dividends or a return of capital.
- The children have one “B” share each. These “B” shares have no voting or control rights but have full entitlement to any dividends or return on capital (which must be approved by the parents).
- The parents can fund the company by way of a loan.
- The company (under the control of the parents) acquires the assets.
- These assets generate a return;
- Income is either reinvested in the company or used to pay the parents’ loan; and
- Any capital value increase benefits the children.
When could you use an FIC?
A FIC can be used as an alternative to Discretionary Trusts for Succession Planning (or in association with a Discretionary Trust). A Discretionary Trust is usually set up as part of a Will whereby the Testator in the Will leaves either a set sum of money or percentage of their estate to their Trustees to be advanced to a beneficiary (or a class of beneficiaries) when certain criteria are met. There is no definitive obligation to make payments as part of the Trust.
Generally speaking, the use of a FIC is for those clients who have a higher net worth. It is important that when considering family investment trusts, tax advice, in conjunction with your accountant, is sought early on as this will play a significant part of the structuring of the FIC as part and parcel of any long term planning. Tax provisions as can be seen are most beneficial when the income and capital is held within the company for a longer period of time.
If you are considering an FIC as part of your succession planning, we will arrange a joint meeting with our Company and Commercial Department and our Private Client Department. We will have an initial discussion with you as to whether or not an FIC would be beneficial to you and meet your needs of your family. We are able to give advice in relation to both setting up the company in preparation of a shareholders agreement (which determines how matters are dealt with within the company in the event of a dispute) and the transfer of assets into the FIC (with particular reference to land and property).