Family investment companies: an innovative alternative to trusts?
When considering succession planning individuals increasingly prefer family investment companies (FICs) to the more traditional trust structure. The rise in the popularity of FICs for long-term wealth management is due to continuing favourable levels of UK corporation tax while trusts are increasingly taxed and regulated.
What is a FIC?
A FIC is an estate planning vehicle which can be used as an alternative to a discretionary trust. FICs can be adapted for each client’s needs, but usually a FIC is a private company which is controlled and owned by the members of a single family. As a company, it is a separate legal entity and can own assets such as property, cash or shares. FICs are used to protect a family’s wealth from the impact of taxation, poor investment decisions, bankruptcy and divorce, preserving it for future generations.
When is a FIC more suitable than a Trust?
Usually a FIC will be founded by the parents (or grandparents) of a wealthy family whose assets would be subject to 40% rate of UK inheritance tax when they died. The founders wish to pass their wealth on to their children, as tax efficiently as possible but do not want to give up control over their assets, or perhaps they do not want to give significant funds to their children or grandchildren at too young an age.
Corporation tax rates are currently 19% (and set to reduce to 17% in 2020); this is much lower than the tax on income for trusts or individuals, which can be up to 45% for each. An immediate inheritance tax charge of 20% is triggered when placing assets in excess of the inheritance nil rate band into a trust. There will be further charges every ten years and an inheritance tax charge on closing the trust or distributing capital. The initial charges for a FIC will be Capital Gains Tax (and possible Stamp Duty Land Tax) on the transfer of assets into the company. However, inheritance tax will be avoided as the gift of the shares in the FIC to children/grandchildren will be considered Potentially Exempt Transfers (PETs) if the founder survives seven years from the date of the gift. This could greatly reduce the inheritance tax liability of the founder of the FIC.
A disadvantage to FICs is that, as a limited company, the entity must file some documents publically with Companies House, whereas trusts are completely private. It is usual for a FIC to have a shareholder’s agreement which contains more sensitive information; this is a legally binding document and there is no obligation to make it public.
Why use a FIC?
- Control – a FIC will often have bespoke articles of association which structure the company so as to give certain individuals (often the parents of a family) more control. This means parents can give away their assets and avoid inheritance tax while maintaining a level of control. The chosen individuals will often be the only shareholders with voting rights, the ability to decide on dividend payments and the discretion to make investment decisions.
- Asset Protection – restriction on who can own the FIC’s shares can keep assets within the family. These restrictions would be contained in the shareholder agreement which is a legally binding document.
- Taxation – the main taxation advantages are outlined above. The tax benefits of a FIC do depend on the rates of UK corporation tax staying at such a favourable level.
FICs are certainly becoming an attractive possibility for individuals considering succession planning options. If you are thinking about setting up a FIC you will need to seek professional advice to see if it is the right choice for your family. Please contact Anna Coakes with our Private Client team for further advice.