A Family Investment Company (FIC) provides a powerful structure for tax-efficient investing, asset protection, as well as ensuring smooth succession and inheritance planning. By combining the benefits of a corporate structure with family ownership, a FIC offers a range of financial advantages for businesses today and legacy structures that can last generations.
Key pillars of the Family Investment Company:
Tax efficiency, investments, and succession planning
1. Tax-efficient investment opportunities
- Corporate tax on investments: FICs allow families to invest in a wide range of assets, for example stocks and shares, loans, gold, property and more, with corporate tax rates on the profits; often lower than personal income or Capital Gains Tax rates. This can result in significant tax savings over time.
- Protecting Business Property Relief: If HMRC rules are breached by your trading company, either by investing funds or simply holding profits within the trading company, you are at risk of losing Business Property Relief (BPR). This is because HMRC will deem your trading company an investment company, and IHT will be due on the assets and shares held. This results in a 40% tax liability. This can be mitigated by simply using a Family Investment Company.
- Retained profits for reinvestment: Profits made by the Family Investment Company can be retained within the FIC and reinvested with or without the need to distribute dividends; your decision! Whilst the FIC is a trust, you still maintain complete control. You are able to move funds in and out of the FIC as you decide, back to the trading company, across to your SSAS (if you have one), to pay dividends or however you decide to use your FIC. This helps to grow wealth within the company, whilst deferring personal tax liabilities.
- Income planning amongst family members: FICs allow shares to be issued to the different family members that you add to the structure. This protects the shares and assets when it comes to IHT, reduces difficult situations later down the line, expensive legal bills and paper –work, and allows for planning. It is also particularly useful when structuring for tax efficiency when family members are in those lower tax brackets and you wish for income to be split across the family, reducing the overall tax burden.
- Use of loan structures: When setting up an FIC, the family members can lend money to the company, rather than directly investing it. This means that interest on the loan can then be repaid tax-free, providing a tax-efficient way to extract value from the company.
2. Inheritance Tax (IHT) and Capital Gains Tax (CGT) advantages
- Reducing Inheritance Tax liabilities: FICs can help to reduce Inheritance Tax in many ways. The company shares are protected as the FIC is essentially a trust. Shares can be allocated efficiently to family members. If family members wish to ‘gift; shares over time, as long as it has been at least seven years since the gift, this also makes for an efficient method for passing on wealth.
- Managing Capital Gains tax: By using a Family Investment Company to make investments, both the business and the family can limit their personal exposure to Capital Gains Tax (CGT). Instead of individuals being taxed on the gains of sold investments, the FIC pays Corporate Tax on profits, which tends to be lower than personal CGT rates.
3. Asset protection
- Limited liability and separation of assets: A Family Investment Company provides legal separation between personal and business assets. This limits liability and protects family wealth from personal risks or creditors, reducing exposure in the event of legal disputes. Ring-fencing assets is an extremely valuable benefit to both business and family.
- Holding assets within the FIC: By holding valuable family assets, such as real estate or intellectual property, within the FIC, these assets are protected from individual family members’ personal liabilities and external claims.
4. Succession planning
- Tax-efficient granting of shares: Through a Family Investment Company, parents can gift shares of the business to their children, reducing the parents’ estate value and, consequently, their Inheritance Tax liability. The use of annual allowances further reduces tax liabilities on such transfers. This empowers business owners and parents, to manage inheritance to the benefit of the businesses, themselves and the family.
- Utilising the Seven-Year Rule: When shares are gifted to family members, the donor can avoid Inheritance Tax on these transfers if they survive for at least seven years after the gift. This makes long-term planning a critical component of using FICs for IHT savings. When also used in conjunction with a Small Self-Administered Scheme, this is even more powerful, creating a Lifetime Business Tax Plan (LBTP).
5. Long-term wealth preservation and your family legacy
- Multi-generational wealth building: Family Investment Companies provide a structured platform for building and preserving wealth over multiple generations. With clear rules and ownership structures in place, FICs ensure that family wealth is managed responsibly and passed on efficiently. Please ensure you employ the services of experts to ensure your FIC is structured for optimum success and efficiency. TLPI are experienced in Tax, Investments, Property and Business.
- Instilling financial literacy: The value of knowledge and experience should not be under-estimated. Involvement of younger family members in the company’s operations helps to educate and prepare them for future leadership, building long-term stability and continuity in managing family assets and the business.
- Flexible legacy and governance: Families can establish governance structures within the FIC to suit themselves. You retain control of the company, just as you do your trading company. However, as some FIC owners do, you have the option of establishing a group, for example a family council or advisory board, to ensure that longer term, decision-making remains aligned with the family’s values and long-term goals. Entirely up to you but this illustrates the flexibility and control a FIC offers, whilst also vastly optimising tax liability and increasing investment power.
Conclusion
A Family Investment Company is a highly effective tool for families looking to maximise tax-efficiency, protect assets, and plan for smooth succession of the business and wealth across generations. From its ability to make tax-efficient investments to reducing Inheritance Tax exposure and protecting family assets, the FIC structure offers a strategic solution for preserving wealth and ensuring long-term financial success. By incorporating a Family Investment Company into your financial strategy, you can create a legacy that benefits your family for generations to come.
A Family Investment Company can be combined with a Small Self-Administered Scheme (SSAS). This is a corporate pension scheme, exclusively available to UK Company Directors of any age. This combination is called a Lifetime Business Tax Plan and is a bespoke product that TLPI can assist you with creating. With a Lifetime Business Tax Plan, you can align your business, wealth, investments, and financial situation to achieve ultimate tax-efficiency whilst protecting and growing your wealth for generations to come.
Find out more about these innovative tax planning structures by speaking to an expert at TLPI.
