Over the past few years, we’ve been seeing a rising trend among our clients. More and more families are exploring Family Investment Companies (FICs) as a wealth management strategy.
As leading UK accountants, we make it our mission to keep our clients up to date with emerging trends in finance. Here, we unpick what FICs are so you can weigh up the benefits of one for your family.
What is a Family Investment Company?
You’re likely already aware of trusts, which have been the go-to family wealth management choice for generations. Unlike trusts, an FIC gives you flexibility to manage your assets while keeping control firmly with you while potentially offering better tax efficiency. Many have found this combination particularly appealing.
If you’re already comfortable with how companies work, you’ll probably find the structure of FICs familiar – as they mirror that of a private company. This also makes it less confusing than many complex trust arrangements.
In many ways, an FIC operates like a company whose purpose is to protect and invest your family’s wealth.
How does an FIC actually work?
Let’s look at a possible example to explain how FICs operate.
Imagine parents who want to pass on £1 million to their children but are understandably concerned about giving them unrestricted access to such a large lump sum. Here’s how a FIC could help:
- The parents set up a company and put in the £1 million
- The company issues different types of shares:
‘A’ type shares for the parents, with voting rights but limited dividend rights
‘B’ type shares for the children, with dividend rights but no voting control
This way, the parents maintain control over the investments while the children can benefit from the company’s success.
The potential tax benefits explained
One of the big benefits to FIC owners is their tax efficiency. Here’s what to know about how the tax breaks they have the potential to offer:
Corporation tax
- Your FIC pays corporation tax at rates ranging from 19% to 26.5% on its profits – potentially lower than personal tax rates.
- Most dividends received by the company are tax-free.
- The company can claim tax relief on costs related to managing investments.
Inheritance tax
When structured correctly, a FIC can help reduce your inheritance tax bill. This is because:
- Gifting shares to family members can become free of inheritance tax after seven years
- Future growth in the company’s value sits outside your estate
- There will be no immediate inheritance tax charges (unlike some trust arrangements)
Is an FIC Right for you?
It’s difficult to recommend a particular course of action without having a full and detailed picture of your finances.
That’s why we’d recommend getting in touch to book a no-obligation meeting with our expert accountants if FICs have piqued your interest. That way they can offer guidance on your best options.
However, in board terms a Family Investment Company could be a good alternative to a family trust if you:
- Have significant assets to protect and pass on
- Want to maintain control while transferring value to the next generation
- Are comfortable with a company structure
- Are looking for tax efficiency
- Want flexibility in how family members benefit
However, it’s worth bearing in mind the following considerations:
- Setting up and running a FIC involves administrative costs.
- You’ll need professional advice to structure it correctly.
- It works best as a long-term planning tool rather than for immediate access to funds.
If the balance of benefits outweighs the other considerations it might be worth considering a FIC for you and your family.
FICs require bespoke structuring
Setting up an FIC will require you to make some key decisions about its structure right from the outset. This can include the following aspects.
Share classes & dividend structure
You’ll need to decide how to structure different share classes to achieve your goals for control and benefit distribution as well as the best dividend structure for how profits are allocated.
Investment strategy
Determining the company’s investment focus – whether that’s property, stocks, or other assets.
Management structure
Deciding on the key decision-makers who will guide the company’s direction and manage operations.
Governance arrangements
Create clear articles of association to ensure smooth running and decision-making.
Arrange a conversation about FICs today
If you’re interested in discussing whether a Family Investment Company could work for your needs, our accounting experts are ready to help find the right solution to safeguard your wealth.
Get in touch with Williamson & Croft.
Want to read more about how to protect your family’s assets or family business? Look into the subject further with our recommended reading below.