Succession planning for your family's future and your business succession is important. If you wish to pass on your business to the next generation, but also want to make sure both your family and wealth are protected. If that is so, then a Family Investment Company (FIC) can be an extremely useful wealth planning tool for tax-efficient purposes.

A Family Investment Company (FIC) can be employed as part of your succession and tax planning strategy to preserve family wealth and ensure the future of your business. Tax savings that the Family Investment Companies produce in categories like inheritance tax, corporation tax, capital gains tax, and income tax are some of the significant advantages of Family Investment Companies.

What is a family investment company?

A Family Investment Company (FIC) is a private company controlled and run by its directors ( this is usually either parents or grandparents).

Like most incorporated companies, a Family Investment Company is limited by shares. Instead of trading, FICs possess investments. Investments a FIC may possess are property, money, or portfolios of equity.

Usually, owners of a business set up an FIC to protect assets and pass on wealth to the next generation.

The founders of the company usually set up the company and give cash or assets, typically under the form of a loan, into the FIC or by using incorporation reliefs. Today, Family Investment Companies are utilized as a substitute for the conventional trust arrangements.

Who would utilize a Family Investment Company?

Family Investment Companies (FICs) are favored by entrepreneurs, high net worth and wealthy family individuals, business owners and high net worth individuals. They are normally set up by higher or extra rate taxpayers with property or investment portfolios who require a tax-efficient way to pass on assets to various members of their family. FICs are ideal for multi-generational, long-term tax planning objectives and passing assets to generations below.

Pros of Family Investment Companies:

There will be considerable tax relief gained by using an FIC. This is due to the fact that the profits of a Family Investment Company are taxed at corporation tax instead of being taxed as income or capital gains

• Lower corporation tax burden: Any profits from investments held in the FIC will pay potentially lower Corporation Tax rates, rather than higher rate income tax.
• Corporation tax: Profits from the assets held in the FIC are subject to corporation tax rates (CT rates are at present 19% to 25% in 2026/25). This is considerably less than the highest income tax rate if profits are withdrawn (Current top rate of income tax is 45%).                                                                                                                                                                                                   

Note: The 25% rate applies to businesses with profits over £250,000 per year. There is a 19% small profits rate for businesses with profits under £50,000 per year. When profits between the two limits, marginal relief is used to fill the gap between the two rates.

• There is also the potential to greatly enhance the return on investment if the FIC has an equity portfolio, since the payment of dividends may be tax-free from company to company.
• FICs can be used to hold a residential property portfolio. Rental profits from the portfolio held by the company will be taxed at corporate rates. Companies can deduct any loan interest from the rental income, whereas personal investors are currently restricted to deducting it at the basic rate.
• Capital Gains Tax: For capital gains, corporations pay corporation tax between 19% and 25%, whereas the highest individual Capital Gains Tax (CGT) is 24% for those paying higher rates.
• Asset protection & wealth management: One can use an FIC to isolate personal assets from business assets. This will safeguard against threats such as legal action and divorce, and will more effectively protect personal wealth.
• Wealth preservation: Wealth may be created, grown and safeguarded for generations to come through an FIC.
• Control and flexibility: Even though assets will be moved to the FIC, directors and founders may retain control over the assets of the company. Various classes of shares can be issued, thus allowing founders to maintain control while other family members enjoy some of the benefits. This offers flexibility in the structure of the income and capital rights, bringing more control and freedom compared to a conventional family trust.
• Inheritance Tax savings: IHT can be a most important issue for families wanting to transfer their wealth. Thus, inheritance tax advantages can be a most important incentive for creating a Family Investment Company (FIC). That is because a share gift to children can be an IHT tax-free transfer. This indicates the worth of the gift would be out of the founder's estate for IHT purposes, assuming they survived the gift by seven years or more.

The movement of funds or assets into an FIC and the later issue or gift of shares to relatives can strip value out of the founders' estate, hence minimizing the IHT liability on their death

• Tax relief on residential mortgages: If a property in an FIC is financed with a mortgage, the FIC can claim the entire interest charge against rental income for tax purposes.
• Dividends and income: Shareholders tend to be compensated via salary and dividend. The tax on the dividend income earned will be charged at the prevailing rates of dividend tax. Dividend tax rates tend to be less than income tax rates, however.

For those who are 18 or over, taking a dividend to the basic rate band is a great method of distributing money out of a company. A company director can usually use this as an alternative to taking money out through a salary to fund further education or university.

• The most tax-efficient benefits will be obtained when capital and profit are kept inside the company for the longer term and then transferred to the next generation.

Drawbacks of Family Investment Companies

Tax implications & tax position: There may be Income and capital gains implications in utilizing an FIC, therefore take professional advice prior to establishing an FIC.

For instance, placing assets in an FIC may cause a Capital Gains Tax charge and a Stamp Duty Land Tax charge. Take tax advice before doing anything and before transferring assets into an FIC in order to prevent unnecessary tax charges.

FIC costs: Initial costs of setting up and ongoing administration for the business, for example, corporation tax returns and accounts annually, can increase the cost of FICs. Tax savings achieved, however, can frequently counterbalance these extra costs.

Depending on specific circumstances: An FIC would not be suitable for every family and would be completely reliant on unique circumstances. For instance, your business would not be a good structure for an FIC if all of the profits are removed.

Family conflict can have a lasting effect on the functioning of an FIC. Immediate family members can disagree over how the business is run, so this will need to be thoughtfully considered and managed.

HMRC's perception of Family Investment Companies: During 2019, HMRC set up a team to examine the application of FICs. The targets were FICs and Inheritance Tax. HMRC found through its investigation that FICs were being employed as a planning vehicle for generational wealth transfer and avoidance of Inheritance Tax. But HMRC discovered no proof to indicate a relationship between individuals who created Family Investment Company Structures and non-tax compliance behavior. So, FICs continue to be a tax-efficient vehicle for the time being and will not likely be targeted by HMRC in the near future.

What's the distinction between a family investment company and a trust?

A Family Investment Company (FIC) works in the same way as a conventional trust. Trusts are potentially less flexible and tax-effective than a Family Investment Company.

Directors and members may still keep shares in an FIC, thus maintaining some control and benefiting from the assets and any profits. Trusts enable assets to be paid for on behalf of the beneficiaries. A trustee can be the settlor, so you do get to keep some level of control over it; however, it generally excludes the settlor of the trust, enjoying the benefits of the assets in perpetuity. If the settlor does receive benefits from the assets in a trust, they are still considered to be part of your estate and liable for inheritance tax.

Due to the intricate tax consequences of an FIC and a trust, you would need to consult a tax expert, e.g., dns accountants, to arrange the appropriate option for you and clarify the tax treatment and implications of the two options. A tax expert will work to prevent the risk of creating unnecessary tax liabilities.

How do I arrange a Family Investment Company?

Always engage a seasoned tax professional like dns accountants to establish your FIC. The procedure normally follows this way:

Founders put cash into the company in return for a mix of loans and shares. You may transfer assets that are not in cash like property; note that this might raise stamp duty land tax or capital gains tax obligations on the transferor.

The founding shareholders give shares in the company to other family members as a possible tax-free transfer.

The founding shareholders generally retain control of the company, including dividends payment and the repayment of capital. This can be done by distributing different classes of shares and making distinct rights held by these shares in the Articles of Association and a shareholder's agreement.

For more help and advice on Family Investment Companies and other tax planning, contact on 01284 332375 or email us on info@taxvatreturn.co.uk