Family Investment Companies (FICs) have gained traction in recent years as an alternative to trusts for succession planning. Their appeal lies primarily in their tax efficiency and flexibility, but they are not a one-size-fits-all solution. Understanding their advantages and potential drawbacks is crucial for individuals considering them as part of their wealth management strategy.
While FIC can be a smart wealth planning tool there are potential drawbacks. Spear’s experts give their insights into key benefits, structure and tax advantages of FICs.
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What is a Family Investment Company (FIC)?
A Family Investment Company is a private limited company established to hold and manage investments for the benefit of family members. Unlike trusts, which can be subject to inheritance tax (IHT) charges, an FIC allows assets to be passed on while benefiting from lower corporate tax rates.
They can be a valuable tool for succession planning, but they require careful consideration to ensure they align with a family’s goals. Consulting with tax and legal professionals is essential to tailor the structure appropriately and ensure compliance with evolving regulations.
As Natasha Oakshett, partner in the private client and tax team at Withers, says: ‘People often talk about them alongside trusts as a way of succession planning.
‘One of the reasons they’re popular is because they don’t suffer the same immediate and ongoing tax charges as trusts do, but they nonetheless provide a safe and secure environment in which to hold wealth, to pass it on, and, in the right circumstances, to enable family members to understand a little bit about how wealth works.’
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How does a FIC work?
Founders (usually parents) maintain control over the company’s assets and investment decisions while allowing family members (typically children) to be shareholders.
Different classes of shares can be issued to allocate voting rights, dividends, and capital growth to family members as needed.
Investments grow within a corporate tax environment, which is often more favourable than personal income or trust taxation.
The company is incorporated with family members as shareholders and generates income from its investments.
Profits are subject to corporation tax (often lower than personal income tax rates) while surplus funds can be reinvested within the company or distributed to shareholders as dividends.
They can be an invaluable tool for wealth transfer. Shares can be gifted to family members, reducing the founder’s taxable estate.
As the company structure allows different share classes, control can be retained while passing economic benefits to children or other beneficiaries.
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Would a FIC work for you?
Oakshett says there is no simple answer to this question and there are many variables.
A FIC is ideal for families with significant wealth who wish to pass on assets while retaining control and benefiting from corporate tax efficiencies. They are also ideal for those who wish to implement a structured long-term investment strategy and protect family wealth for future generations.
However FICs may not be suitable for those needing direct access to funds, individuals with primarily capital gains-generating assets, or those unwilling to navigate the complexities of corporate structures.
If you have an international family, a FIC may present tax complications for US shareholders, which will need to be considered.
‘What suits you could be a combination,’ explains Oakshett. ‘It will come down to a combination of what your motivations are in terms of succession planning versus cost of structure versus tax, which will then be impacted by what you’re actually thinking you’re going to put in the FIC. You end up with this matrix of different variables which might drop you out in a FIC of some type, or it might not, or it might drop you out in a FIC for some of your assets, but, for example a trust or a partnership for other assets.’
FICs and tax efficiency
One of the main reasons families opt for FICs is their tax efficiency. In the UK, corporate tax rates (currently 25 per cent) are often lower than personal income tax rates, which can reach up to 45 per cent. By holding investments within a company structure, high-income individuals can significantly reduce their tax burden.
However, tax efficiency depends on the type of assets placed into the FIC. Oakshett explains that for income-generating assets, FICs can be advantageous as some dividends received by UK tax resident companies are exempt from corporation tax and otherwise it is possible take advantage of the difference between the UK corporation tax rate versus the higher rates of personal UK income tax. On the other hand, she cautions, for capital gains-producing assets, the benefits are less clear. The current capital gains tax rate for individuals (24 per cent) is lower than the corporate tax rate (25 per cent), meaning there is little to no tax advantage in such cases.
Additionally, if beneficiaries need regular access to the wealth, an FIC may not be the best option. Extracting money from an FIC typically involves dividend distributions, which incur additional tax liabilities at the shareholder level. This dual taxation layer can reduce the overall effectiveness of the structure if not carefully planned.
‘If the person who you would have given that asset to needs the income stream every year, a FIC is not helpful, because to get it out, they’ve got to pay the dividend tax and they may already have paid corporation tax on that same income,’ Oakshett tells Spear’s.
International considerations and structuring
For families with international ties, structuring an FIC requires additional consideration, Oakshett tells Spear’s. Offshore entities, such as those based in Jersey or Guernsey, can provide flexibility if the family is likely to relocate. However, such structures are subject to strict anti-avoidance rules, and compliance with UK tax regulations is essential to avoid potential scrutiny from HMRC.
Funding an FIC can be done through capital injection (issuing shares) or loans. While loans can sometimes provide a tax-efficient means of accessing funds later, they are subject to complex tax regulations that require careful planning to avoid unexpected tax consequences.
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FICs are often considered alongside trusts and family partnerships, which serve similar succession planning purposes. Trusts involve a more definitive separation of assets from the original owner, potentially offering better inheritance tax benefits. However, trusts are subject to periodic charges that do not apply to FICs.
The right choice depends on the individual’s objectives, the assets involved, and their willingness to relinquish control.
Oakshett also cautions that, while FICs are subject to future HMRC scrutiny.
In April 2019, HMRC set up a specialist unit to understand the characteristics of a FIC and to investigate any tax risks associated with the use of FICs. However, this unit was disbanded in 2021 having concluded that the use of a FIC does not suggest that those using them are acting in a non-compliant manner in relation to their tax affairs.
‘Whilst this has provided some comfort, that doesn’t mean they can’t start looking again at FICs and if HMRC see a lot of value flowing into these entities, you can see that they might become interested in testing some of the areas,’ she says.
Who should consider a Family Investment Company?
While FICs offer numerous benefits, they are not suitable for everyone. They work best for:
- High-net-worth individuals with a long-term succession plan.
- Families who do not require immediate access to investment income.
- Those looking to take advantage of corporate tax efficiencies while maintaining control over assets.
- International families who need a structured approach to managing wealth across jurisdictions.
FICs may not be suitable for those needing direct access to funds, individuals with primarily capital gains-generating assets, or those unwilling to navigate the complexities of corporate structures.
