Understanding Family Investment Companies | Quilter (2024)

A Family Investment Company (FIC) is a purpose-built company created with the purpose of distributing and controlling family wealth. This article explores how this is achieved and considers the trust alternative.

A Family Investment Company (FIC) is a company created for the purpose of holding and managing family wealth. The ‘founder’ creates the company and transfers assets to it such as cash, shares, property or makes an interest free loan. They’re initially the sole shareholder in the company, but they can give away shares in the company to other individuals, usually family members.

Limited or Unlimited?

The company with either be a limited or unlimited company. A limited company has the benefit of limiting the liability of the shareholders in the event of the company’s insolvency. However, as many FICs will only hold investments and not take on debt, the unlimited liability structure may provide additional benefit of simplicity and privacy as they’re not required to file accounts with Companies House.

Retaining control

The structure of the company is designed to provide the founder with control over the management of the company’s assets and distribution of wealth amongst their family. Key aspects of the company’s structure can be tuned to make this happen:

‘Alphabet’ shares

The creation of various share classes is key to control, these are usually given labels such as A,B,C,D… These share classes can have different benefits such as voting rights in company decisions, rights to dividend distributions and a right to capital when the company is wound up.

The founder can retain certain share types for themselves and/or selectively distribute share types to chosen individuals.

Appointment of company directors

The director has control of the company, its assets, and the distribution of dividends to shareholders. The founder will usually be the initial director and the process of appointing a replacement can be dictated in the articles of association and voted for by shareholders with voting rights.

By retaining shares with voting rights, the founder maintains their control over the company and its assets. They can give away those shares if they wish to relinquish control or specify a beneficiary in their Will.

Restriction of share sales

Transferring shares to family members could result in a loss of control in the company if they choose to sell or gift those shares. Rules can be put in place using the articles of associate to ensure the company or other family members first refusal in purchasing shares.

Tax planning with FICs

Inheritance tax

As the founder initially holds all the shares in the company, the transfer of assets is not a gift for inheritance tax as the value of the assets is now reflected in the share price. However, care should be taken as there may be other taxes, such as capital gains tax and stamp duty when assets are transferred.

As the company will be considered a non-trading company, no business property relief (BPR) can be applied to the shares. Inheritance Tax (IHT) planning is achieved by gifting the shares to other individuals. The gift will be a Potentially Exempt Transfer (PET), the value of the gift will leave the founder’s estate if they survive 7 years after the gift is made.

The value of the shares is immediately a part of the recipient’s estate. The share’s value is driven by the value of the assets held within the company. However, they’re likely to have a ‘discounted’ value in the hands of family members as they’re deemed to have a minority shareholding with little or no control over the company. This means that a FIC whose shares are broadly dispersed across family members could cumulatively provide a significant IHT saving when compared to holding the assets directly. Though it is important to note that shareholders which are married or in a civil partnership will have their holdings combined when considering if a discount can be applied.

Corporation Tax

Assets held within a FIC will be subject to corporation tax on gains and income. Dividends received are exempt from corporation tax.

Corporation tax rates have been at a historic low in recent years at 19% - Making FICs particularly attractive to higher and additional rate tax payers who would pay 40%/45% (interest) and 20% on capital gains (after exemptions / allowances) on assets they held directly. As of 1 April 2023, a rise to corporation tax rates to 25% reduced the tax saving - particularly in comparison with capital gains tax rates. However, this tax environment is likely to remain attractive to higher and additional rate tax payers, especially when considering the exemption to tax for dividends yields from equity holdings.

It's worth noting that whilst there is a reduced rate of corporation tax of 19% for companies with a profit under £50,000 this cannot be claimed by a close investment-holding companies and so is unlikely to apply to a FIC.

Extracting profits

Whilst the corporation tax environment could provide a benefit compared to holding assets directly, it’s necessary to consider the personal taxation which can apply when extracting company profits.

Dividend distributions to shareholders are subject to income tax at their marginal rate - 8.35%(BR) 33.75%(HR) and 39.35% (AR). The dividend allowance where 0% would be applied is £1,000 from April 2023 and reduces to £500 in April 2024 - reducing tax efficiency of dividend distributions.

The company can make a pension contribution as a method of extraction. However, pension tax relief on the contribution will be limited to the recipient’s available annual allowance. Unlike a trading company, a FIC is unlikely to receive any corporation tax relief on the contribution.

Planning with interest free loans

It is common for the founder to make an interest free loan to the company. This has the benefit of allowing the found to recall their loan at any time - maintaining access to their capital. Repayment of the loan is a return of capital and will have no income tax or capital gains tax applied.

For IHT, the loan remains within the founder’s estate. When they transfer the shares to other individuals the value of the gift is likely to be low / negligible as the share value reflects the debt of the company. This lowers the IHT impact if death occurs within 7 years of the transfer. It’s possible for the investment growth achieved to be apportioned to the gifted shares, effectively allowing investment growth to be outside the founder’s estate.

How do trusts compare?

For many, trusts could offer an alternative to the Family Investment Company - as they have the ability to replicate the features of control, wealth distribution and inheritance tax planning.

When placing assets into trust the ‘settlor’ can choose their trustees (of which they can be one) and beneficiaries. A discretionary trust provides the trustees with the power to decide how and when assets are distributed. These benefits could be a stream of income, capital payments or an interest free loan.

Like the articles of association, a trust’s rules are contained within its deed. The settlor can arrange for bespoke wording to provide specific powers to ensure control is retained. Such as rules for appointing replacement trustees and / or beneficiaries.

Inheritance tax

Inheritance tax planning is usually ‘baked in’ to most trust solutions. By transferring assets to a trust, the settlor is making a gift. Assuming the settlor is excluded from benefiting the trust fund, then the gift is deemed to have left their estate after a period of 7 years has passed

There are restrictions to this flexibility. A settlor can make gifts to discretionary trusts up to the nil rate band (NRB) every seven years without an immediate charge. However, if this limit is exceeded there will be an entry charge of 20% on the excess.

Discretionary trusts are also subjected to ongoing ‘periodic’ IHT charges every 10 years as well as ‘Exit’ charges when assets leave the trust. The maximum rate of tax is 6% of the trust’s value.

Further details on these IHT charges and how the ‘Rysaffe’ principle can be employed to maximise efficiency can be found here: Entry, Periodic and Exit Charges - Quick reference guides.

Using a Discretionary Loan Trust

Loans to discretionary trusts are not a gift and so are not limited to the nil rate band - making them a potential alternative to the FIC.

In this scenario, the settlor makes an interest free loan to a discretionary trust which is then invested by the trustees - usually into an onshore investment bond. Just like the FIC, the loan remains within the estate of the settlor for IHT purposes, but the growth achieved by the trustees is immediately outside their estate.

The discretionary trust structure provides the flexibility and control whilst the underlying bond achieves simplicity. Dividend yields from the underlying investments are exempt from tax within the bond, and interest and capital gains are charged at the rate of 20%. This taxation occurs within the bond ‘wrapper’ and doesn’t require reporting by the trustees. It also gives a 20% income tax credit against chargeable gains which are realised when the bond is eventually encashed. To repay the settlor’s loan, the trustees have a tax deferred allowance which allows 5% of the bond’s premium to be repaid each year without an immediate tax liability. For further details, see our guide to the discretionary loan trust.

The information provided in this article is not intended to offer advice.

It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.