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Markel Tax

22 Jun 2020

Family investment companies – the way forward?

In the past year there has been a proliferation in the use of family investment companies (FICs) to protect family wealth and pass it down the generations.
A FIC, either with or without trusts or other companies, can enable family wealth and income to be moved tax-efficiently around the family. At the moment, property and share values have fallen so now might be a very good time to undertake such planning.

What is a FIC? 

A FIC is a private limited company, the shares of which are held by various family members, usually from different generations. The FIC typically carries on an investment business. The FIC issues a number of different classes which can have varying voting, capital and income rights. This gives flexibility while keeping tight control on the company.  

A shareholders’ agreement sets out how the company is run, remuneration of working shareholders, who can hold shares in the company and what happens to the shares on death, divorce, permanent incapacity or bankruptcy of a shareholder. Getting this right at the outset allows the company to run smoothly and can avoid family disputes at a later date.

Why would a family want to use a FIC?

There are various reasons for using a FIC rather than another structure, such as a trust. Trusts are perceived as complex, and no longer as flexible and tax-efficient as they used to be, and in recent years they have had bad press, frequently being associated with tax evasion and avoidance. However, family structures can (and often do) include a combination of FICs and trusts which can be combined to provide income and capital tax-efficiently to shareholders while protecting family wealth. Often used as an alternative to trusts, FICs are perceived as more ‘user-friendly’, cheaper to run, and less complicated in terms of taxation and compliance. 

One of the more practical reasons for using a FIC is that shares can be controlled easily – what dividends are paid and to whom, who has the voting rights to control dividends, and who runs the company, as well as when and how the shares can be disposed of, and to whom. Wealth can be accumulated tax-efficiently within the structure, and this allows assets and wealth to be retained within the family and passed on with less risk of being lost through divorce, bankruptcy, or spendthrift heirs than if it is passed on as personal wealth.

Funds and assets can be transferred tax-efficiently into the structure, and whoever sets it up can continue to benefit from the structure, which is often not the case with trusts.

A FIC is usually funded by preference shares or interest bearing loans. The directors (who are also usually shareholders) make the decisions as to how to invest the funds to generate income or growth, or a mixture thereof. Any profits are taxable, but at corporation tax rates, and the net profits can be reinvested or distributed as required. In addition, if the company receives dividends, these are generally not subject to tax. So if the sole income source of the company is dividends, tax on this income could be deferred until a dividend is paid to a shareholder.

Summary

FICs have become popular as a more cost-efficient alternative to trust structures while providing many of the same benefits, such as discretionary payments.  If structured properly, a FIC can be a strong, stable structure, capable of outlasting more than one generation. A FIC allows a family to govern its own affairs, and allows funds to be distributed to the right person at the right time, often tax-efficiently. A FIC pays none of the high income tax charges of a discretionary trust. Depending on the company’s source of income, in certain circumstances, tax may be deferred on the income of the company until the profit is in the hands of the shareholder.

To discuss how a FIC could benefit your client contact Nicola Goldsmith or on +44 (0) 333 920 5708.

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Next article in series

22 Jun 2020

Avoiding the pitfalls of CJRS claims