A family investment company (FIC) can be an attractive alternative to a trust as a vehicle to preserve family wealth and mitigate taxes. A FIC typically has lower running costs than a trust and enables those who establish it to retain a degree of control.
This guide was updated in November 2018
What is a family investment company?
A FIC is a private limited company created for wealth accumulation and family succession planning. It can invest in cash, property or shares. The FIC usually has bespoke Articles of Association and a private Shareholders' Agreement which is used to control the transfer of shares inside and outside the family.
How are they established?
Typically parents provide funds either by subscribing for shares or providing loans to the company. The class of share is generally used to differentiate between the generations, the parents having voting shares and their children only economic rights. The FIC can be used to reduce the parents' wealth, without any immediate inheritance tax charge whilst allowing the parents to retain some control.
How are they operated?
The parents are usually directors but the children can be involved in the investment decisions of the business, which can also be used as a tool to educate them. The directors will determine when dividends are paid and will make general management decisions of the company. If family members are employed by the FIC, a salary can be paid, subject to the usual rates of tax and NIC.
How are they taxed?
The company will pay corporation tax on its income and capital gains (currently at 19%, falling to 17% from 1 April 2020). Most dividends received by a company are exempt from tax, however it is beneficial not to invest in foreign companies in jurisdictions where dividends are subject to withholding tax as this would be a real cost.
Shareholders are taxed at various rates on dividends after the £2,000 allowance, from 7.5% for basic rate taxpayers, 32.5% for higher rate and 38.1% for additional rate taxpayers. Capital gains tax (currently at 20%) will apply to the individuals on the sale of their shares or on the eventual winding up of the company.
Who may find them attractive?
FICs may be attractive to the following:
- A person who has already created his or her own business and who has young adult children whom he or she wants to educate and protect.
- Hedge fund managers or sophisticated investors who wish to provide for their family or to educate their children in the world of business and investment, without the children being exposed to the risks and responsibilities of running their own business.
- A family who have received a significant inheritance and who wish to preserve and control family wealth whilst simultaneously providing protection of the wealth from conflict within the family.
- Any privately held company.
Contact an adviser
