Family investment companies: an alternative approach to succession planning

Posted on 11 January 2018

Family investment companies: an alternative approach to succession planning

Despite trusts being the traditional wealth and succession planning preference, family investment company ("FIC") structures are being increasingly used by individuals as an alternative. We are seeing this trend grow due to the UK's low corporate tax rates and the level of control family members can retain over assets owned by a company.

What is a FIC?

FICs are UK private companies specifically incorporated for the purpose of wealth and succession planning. As a legal person, a FIC can own assets such as cash, property or shares. Bespoke articles of association can be drawn up to ensure family members (being the "shareholders" of the FIC) have in place a written constitution that defines how the company is to be governed and run. The family members can also enter into a legally binding shareholders' agreement, which can be used as a private document to cover discrete matters relating to the ownership of the FIC or of any of its assets.

FICs and trusts: a brief tax comparison

Trusts are created to manage assets and are governed by a private trust deed. An immediate inheritance tax entry charge of 20% applies on the transfer of most assets into the trust. In comparison, although FICs are within the remit of UK corporation tax, a contribution of assets to a FIC would not generally be subject to an immediate inheritance tax charge.

A gift of shares in the FIC by a family member would generally be considered as a potentially exempt transfer for inheritance tax purposes, meaning there would be no immediate tax charge.

Why use a FIC?

The benefits of using a FIC structure include:

  1. Ownership structure – ownership of the FIC can be structured in order for certain individuals (often the parents) to retain the voting rights, while others (for example, the children) only have a fixed economic right. This enables individuals to give their assets away in the form of the FIC's shares while retaining an element of control.
  2. Control – directors of the FIC, who can be the family members themselves (and often just the older generation), will have control over the timing of dividend payments and investment decisions.
  3. Taxation – a company's income and capital gains will be subject to UK corporation tax (currently at 19%) and the FIC's income and gains can then be accumulated until a distribution by way of dividends is made, which will be taxed at up to 38.1%. In contrast, trusts are immediately taxed at a rate of up to 45% on income and up to 28% on capital gains. In addition, trusts are subject to 10-yearly and exit inheritance tax charges.
  4. Asset protection – restrictions on share transfers can be included in a shareholders' agreement to ensure that the shares are not transferred outside of the family without the consent of the controlling family members.

FICs will appeal to certain individuals and make them a viable alternative to trusts. Clients should bear in mind that there are certain administrative and reporting requirements under UK law.