A recent Telegraph article referred to Family Investments Companies (FICs) as a ‘little-known alternative to trusts’ that could reportedly help people ‘dodge’ inheritance tax. Contrary to this belief, FICs are not so ‘little-known’ amongst its key audiences, having grown significantly in popularity over recent years as a flexible and potentially tax-efficient vehicle for holding and growing family wealth.
Once a niche structure used by only the wealthiest families, demand for FICs has been on the rise since 2006, and as an alternative to the once all-powerful trust structure. However, more so than for its ‘tax-dodging’ profile, the benefits regarding wealth preservation and intergenerational transfer are far more crucial factors behind a FIC’s increasing appeal.
What is a Family Investment Company?
Not defined in statute, in simple terms a FIC is a private limited company owned and controlled by members of the same family, primarily to hold and manage family investments, with an appropriate governance structure built in. There are, of course, family trading companies but these are not the focus of this article.
A key feature of a FIC is often its flexible share structure. In addition to ordinary shares, a FIC typically issues multiple classes of shares, allocated to different family members across different generations. These might include:
- Ordinary shares, carrying full voting rights and economic participation;
- Growth shares, designed to capture future appreciation in the value of the company;
- Freezer shares, which fix the current value of the founder’s interest, allowing future growth to accrue to younger family members; and
- Redeemable or exclusive shares, tailored to specific family arrangements.
A FIC share structure can therefore allow value and control to be separated. Senior family members — typically the founders or parents — can retain voting control and access to income through their share class, whilst transferring economic growth to children or grandchildren through a different class of shares.
How is a Family Investment Company taxed?
The taxation of a FIC needs to be considered across four stages:
- Creation: Funding a FIC with cash is generally the most straightforward approach from a tax perspective. Transferring assets into the company can trigger capital gains tax (CGT) if the asset has appreciated in value, and stamp duty land tax (SDLT) where real estate is involved. Inheritance tax implications may arise depending on how the shares are structured and who holds them, and professional advice is essential at the outset.
- Lifetime Taxation: Once established, the FIC pays corporation tax on its income and gains. Following the increase in rates of corporation tax, FICs no longer enjoy as large a tax differential over personal rates as they once did. However, for investment income — particularly dividends received from other UK companies — the corporate inter-company dividend exemption can make a FIC highly efficient, as such dividends are generally received free of further corporation tax. Capital gains within the FIC are taxed at the corporation tax rate. Investment income and gains that are retained and reinvested within the FIC benefit from compound growth at the lower post-tax retained rate compared with investments held personally.
- Extraction of Value: How value is extracted from a FIC affects the overall tax efficiency of the structure:
- Dividends: subject to dividend income tax in the hands of the recipient shareholders (assuming they are UK resident);
- Salary: where family members work for the FIC, a salary can be paid and will be deductible against the company’s profits, though it will be subject to income tax and National Insurance in the usual way;
- Loan repayment: where the FIC was funded by a shareholder loan, repayment of that loan is not an income event and can be a tax-efficient means of extracting the original capital;
- Capital distributions on winding up: generally subject to CGT, with the benefit of any available reliefs.
- Winding Up: On a winding up, distributions to shareholders are generally treated as capital receipts, potentially attracting CGT. Planning the eventual exit from the structure — including consideration of Business Asset Disposal Relief and holdover relief, where available — is an important part of the overall strategy.
Family Investment Companies and Succession Planning
Some of the most compelling characteristics of a FIC as a succession planning tool center on its versatile nature:
- Gradual wealth transfer without loss of control. By issuing growth shares to children or grandchildren at the outset, the FIC allows future value to accrue to the younger generation from day one, without the founders relinquishing their voting rights or access to income.
- Inheritance tax planning. The value that accumulates in the FIC in the hands of younger family members is outside the founding generation’s estate, and careful structuring can reduce or manage the IHT exposure of those shares over time.
- Family governance. A FIC brings generations together as shareholders and directors, creating a shared stake in the management and growth of family wealth from an early stage. Alongside the articles of association and shareholders’ agreement, a family charter can be drawn up to set out the family’s values, investment philosophy, and governance arrangements — providing a framework for decision-making extending beyond the purely legal and financial.
- Flexibility over time. A FIC can evolve as the family’s circumstances change – share classes can be redesigned, new family members can be introduced, and the investment strategy can be adapted — all within the corporate framework. It is also possible to convert an existing family company into a FIC where the family holds other businesses.
Conclusion
A FIC can be a powerful vehicle for managing, growing, and transferring family wealth across generations. Its ability to separate economic value from control, combined with the flexibility of its share structure and its suitability as a governance framework, makes it a compelling alternative to traditional trust-based planning.
However — as the title of this article suggests — a FIC is not a quick ‘fix’ for those seeking to mitigate their tax exposure. Establishing and maintaining one requires careful professional advice at every stage, from the initial structuring and funding, through the ongoing tax compliance obligations, to the eventual exit strategy.
This article is for general information purposes only and does not constitute legal or tax advice. Specific advice should be obtained in relation to your individual circumstances.
