What is Family Investment Company? How does a Family Investment Company work? How do you set one up?
The first step is to understand these key questions so that you are well-informed and can decide whether this unique and innovative structure is right for you, your business, and your family.
A Family Investment Company (FIC) is a company that you set up specifically to manage and protect family wealth, offering an efficient way to pass assets down through generations. In addition, the FIC allows you to manage company profits in a tax-efficient manner, avoiding a hefty penalty for your trading company. It also allows you to invest and hold profits and assets in a more tax-efficient wrapper.
Here we will cover everything you need to know about FICs, from their structure and benefits to the tax advantages and setup considerations.
A Family Investment Company (FIC) is a private limited company, typically set up by the director of a trading company, and with consideration for the benefit of family members. The primary purpose is the holding and managing of business profits, family assets, investments, properties, or cash. Family members typically hold shares in the company, and it is commonly used as an alternative to a family trust, providing greater control, flexibility, and potential tax benefits.
FICs have gained popularity due to their ability to balance wealth protection and tax efficiency, whilst still allowing you to maintain total control. Here are the main reasons business owners and families choose to set up a FIC:
A Family Investment Company operates as a standard company, but the ownership is tailored and share structures created to allow for specific goals, such as tax planning, asset protection, and control over family wealth. It is extremely tax efficient, and very flexible.
Corporation Tax
FICs are subject to Corporation Tax on their profits. This includes income from investments, such as interest, rent, and dividends. As mentioned, the corporate tax rate in the UK is lower than the highest rates of Income Tax for individuals.
Income Tax
When dividends are paid out to shareholders, they are subject to dividend income tax at the personal level. However, this can be planned carefully to reduce overall family tax burdens.
Inheritance Tax (IHT)
FICs can be structured to reduce the founders’ personal estate over time, which can help mitigate IHT. For example, by gifting shares to family members, founders can benefit from IHT exemptions over a period of 7 years, at which point, the liability does not exist.
Capital Gains Tax (CGT)
FICs are liable for Capital Gains Tax on profits made from selling assets, but at the Corporation Tax rate, which can be lower than the CGT rate applied to individuals.
For each business owner and family, the planning strategy and set-up of their Family Investment Company should ideally be approached as a bespoke structure. Specific circumstances, aims and goals need to be considered. Performing due diligence and leveraging the help of experts is advisable to ensure all tax benefits and advantages can be taken advantage of.
The following factors should be taken into consideration:
Step 1: Setting up the company
Put simply, a FIC needs to be set up as a company and registered. A FIC expert can advise upon the legal registrations and process for doing so.
Step 2: Share Structure
Determine a tailored share structure that meets the your objectives. Typically, there will be different classes of shares, with founders holding voting shares and family members holding non-voting shares. The goals include passing on asset growth to future generations with minimal inheritance tax exposure, distributing income and ensuring timely succession and benefits. An expert can advise on the right setup to meet your aims and goals.
Step 3: Capital Injection
The company, i.e. you as the trading business owner who has set up the FIC, can contribute capital or assets to the FIC. That could include cash, investments, property, etc.. These assets are then owned by the company, rather than individuals. As the FIC director, you can make decisions on moving both to and from the FIC.
Step 4: Tax Planning and Legal Advice
It is essential you seek professional advice to ensure the FIC’s structure is tax-efficient and compliant with legal requirements. Considerations such as CGT, IHT, and dividend taxes etc., should be carefully planned.
Step 5: Ongoing Management
The company will require regular management, including the filing of annual accounts, tax returns, and making investment decisions. Again, an expert can advise upon this and what is required.
Setting up and managing an FIC can be complex, especially when it comes to efficient and compliant tax planning and legal structuring of the setup. Professional advice is essential to avoid costly mistakes and unexpected penalty. Equally, it helps to ensure you are taking advantage of any benefits and tax considerations available to you.
There are costs involved in incorporating and maintaining a FIC, including legal, accounting, and administrative expenses. This will always be explained to you in full by an experienced FIC adviser. However, the purpose of a FIC is to grow your wealth, so ensure you employ the right support.
We are all too aware that tax laws and regulations can change! This may impact the advantages your FIC is enjoying but because of the flexibility business tax planning affords, by keeping updated you can pre-empt and mitigate any negative impact and equally, take advantage of positive changed. Simply speak to your experienced adviser about understanding the power of your FIC.
While both FICs and trusts are used for wealth management and succession planning, they have key differences:
A Family Investment Company can be an excellent tool for families looking to manage their wealth in a tax-efficient manner whilst retaining control and protecting their wealth and assets. However, the decision to set one up should be made carefully, with due diligence and with professional guidance to ensure it aligns with the business and family’s long-term goals and over-all tax strategy.
You can find out if a Family Investment Company would be suitable for your situation by taking our free, 60-second test here.
By using this page as a starting point, business owners can explore the advantages and potential considerations of setting up a Family Investment Company that is tailored exactly to their needs.
