Family Investment Companies:
A Modern Solution to Generational Business Succession
Family businesses are a key pillar of many economies, providing stability, innovation, and long-term value. Whether managing a retail operation, a small manufacturing company, or a family farm, owners face the complex challenge of passing their businesses onto the next generation whilst also navigating an evolving financial landscape and ensuring continued growth.
A Family Investment Company (FIC) offers a flexible and tax-efficient vehicle for preserving family wealth and ensuring smooth succession whilst remaining in total control. If coupled with a Small Self-Administered Scheme (SSAS) pension, even greater strategies can be achieved and robust succession and retirement plans put in place.
The Evolving Landscape for Family Businesses
Tax legislation changes have intensified the need for proactive planning. The 2024 UK Budget introduced significant updates to Inheritance Tax (IHT) and Capital Gains Tax (CGT) liabilities and rules. Agricultural Property Relief (APR) and Business Property Relief (BPR), both crucial tools for those looking at reducing tax burdens on business assets, are now capped. Beyond these limits set, businesses face additional and immediate tax liability. CGT rates have changed, making the transfer of assets during the business owner’s lifetime essential to address with a tax plan.
Whilst the specifics of these changes impact situations differently, for example APR and farms, they are representative of broader challenges facing family businesses across diverse industries. Without strategic planning, these tax liabilities could result in the forced sale of critical assets, thus disrupting operations and long-term goals?.
What is a Family Investment Company?
A Family Investment Company (FIC) is a private company established to manage and protect family wealth, and is especially designed to facilitate generational transfer of a business and legacy, whilst minimising tax exposure. The usual setup is that the business owner, as the older generation involved, will set up a FIC and retain full control over all decisions. In essence, they will manage this company as they do their trading company. They are able to invest via the FIC, inside of the tax-protected wrapper, without risking the loss of Business Property Relief for the trading company and mitigating IHT as doing so via the FIC. Family members are part of the FIC setup, leveraging IHT exemptions and benefits upon death of the donor. Because assets are held within the FIC, this allows for retirement and succession planning.
Unlike traditional trusts, Family Investment Companies (FICs) offer a greater level of control, more flexibility, and better cost efficiency, which makes them an increasingly popular option for modern and innovative family businesses?.
For those growing a family business and diversifying to meet the needs of today’s economy, this diversification can be facilitated by the use of pension funds for business growth. By also implementing a Small Self-Administered Scheme (SSAS) pension, 50% of the pension funds can be loaned to the trading company for any valid business purpose. Regulations state that you can set your own, low interest rate on loan repayments (as long as it is at least 1% above the Bank of England base rate) to achieve low-cost funding or alternatively, set a high interest rate to save Corporation Tax for the trading company and escalate pension growth. This facilitates a rinse-and-repeat strategy meaning you can continue to fund business growth at the same time as growing the legacy.
Benefits of FICs for Family Businesses
- Tax Efficiency: FICs provide opportunities to reduce IHT and CGT liabilities. Assets held within a FIC grow tax-efficiently. The FIC benefits the business, the family, and the beneficiaries as shareholders, thus protecting the business from certain tax burdens and dividends can be paid out with ultimate tax efficiency
- Control and Flexibility: The founder of the FIC retains control over decisions and how the FIC is managed whilst it facilitates the next generation benefiting from the legacy and sharing the company’s income if desired. The balance ensures business continuity, robust succession plans, and timely retirement strategies.
- Long-Term Security: Assets within a FIC are ring-fenced from creditors and protected for the future generation, whatever the business aims and goals are built to achieve.
Example
Let us look at the example of a large family farming business. The actual farm is of high value, with many acres of farmland and farm buildings. However, as far as liquidity is concerned, should short-term cash be required, it would mean selling off large assets or a portion of the farm. Without a tax plan in place, the farm finds itself subject to heavy tax liabilities, should the worst happen. In addition, the business owner – in this case the farmer – is subject to the changes to the APR and BPR rules brought in by the recent budget.
The farmer can set up a FIC. This means that he can transfer income/profit into the FIC and mitigate tax liabilities. He can invest the funds as he sees fit, for example by loaning them to the business, or investing them in property. As he builds his property portfolio, owned by the FIC, he can have the peace of mind that it is protected. As the next generation takes ownership of the farm through a planned share strategy, the structure preserves the farm as a viable operation whilst ensuring that finances benefit the whole family. Aims and goals can all be achieved using various strategies within the tax plan.
With the addition of a Small Self-Administered Scheme (SSAS) into your plan, (creating a Lifetime Business Tax Plan), pension funds can be used to loan to the business, providing cash-flow and incidentally, also reducing the trading account balance, thus Corporation Tax. The loan must be paid back to the pension over 5 years, and is classed as a valid business expense. Income that the SSAS receives is not liable for income tax as inside a pension. The business owner must set the repayment rate at a minimum of 1% above market base rate, but many set the interest rate high (for example 12%) as this repays the loan quickly, grows the pension to a greater extent, reduces the trading company balance sheet and provides an either larger pot to rinse and repeat the strategy. There are many strategies available to business owners, but each situation is different, so leverage expertise to find out what would work for your business, family, aims and goals.
Challenges and Considerations
Whilst a Family Investment Company has extensive benefits, it is import not to dismiss the complexities involved in setting them up correctly. Professional advice is recommended to make sure that your FIC is structured to optimise tax mitigation, meet HMRC regulations, and to ensure all aspects of your family business requirements for both now and the future are covered in your strategy.
Futureproofing
Family businesses across many industries and sectors – farms, personal services, warehousing, retail, leisure – must increasingly adapt to meet changes to tax legislation head on. A Family Investment Company is extremely powerful and enables businesses to achieve resilience and longevity for sustainable family legacies. A proactive approach to succession, legacy, and retirement planning is essential for business owners who want to safeguard their legacies, protect their assets, and build a platform for continued success.
It is essential to leverage professional guidance when tax planning at this level. The earlier a tax plan is implemented, the better to ensure the business and the family benefit in full from the opportunities a Family Investment Company (FIC), a Small Self-Administered Scheme (SSAS) and a Lifetime Business Tax Plan (LBTP) can provide. Mitigating risks, reducing tax, and complying with legislative changes can be complex but are essential for family businesses.
