The rise of Family Investment Companies

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In the last couple of years, the use of family investment companies (FICs) in estate planning has grown rapidly. Once thought of as “cutting edge”, now a failure to consider a company is probably a potential negligence claim. But what are FICs, and are they all the same?

In the last couple of years, the use of family investment companies (FICs) in estate planning has grown rapidly, but what are FICs, and are they all the same?

A FIC is generally an English company, and usually unlimited, to avoid the need to file accounts at Companies House. One of the key advantages is the separation of ownership (in the form of the shares) from control (which rests with the directors). This allows you to give away value for estate planning purposes but retain control; and the company structure provides a layer of asset protection – much like trusts. By using bespoke drafting in the articles of association and a supporting shareholders’ agreement, we can finesse each FIC to suit each family’s particular requirements.

Establishing a FIC provides two significant inheritance tax saving opportunities, which are best illustrated with examples.

Example one: Gerald and Joan

Gerald and Joan have cash resources of £2 million which they can afford to pass on. They have two children, John and Barbara. John has two children, Rachel and Sam; and Barbara has one child, Freddie.

If Gerald and Joan establish a FIC, they may choose to give the five other family members an equal share – ie, 20 per cent of the shares each. Gerald and Joan do not take any shares but they appoint themselves as directors and control the company from that position.

The initial gift of £2 million is a “potentially exempt transfer”. This means there is no immediate inheritance tax and, provided Gerald and Joan survive seven years from the formation of the company, they will save inheritance tax of £800,000. This is a major advantage of the FIC - had Joan and Gerald put £2 million into a trust, they would have triggered an immediate inheritance tax liability of £270,000 or more.

The second saving comes from the size of the shareholdings held by the children and grandchildren. Their shares will of course be subject to inheritance tax in their own estates. However, when valuing those shares, a discount will be applied to reflect that they have a minority interest. The discount could be as much as 50 per cent, which would mean that, of the original £2 million, only £1 million is exposed to inheritance tax if all the family die. This is a further saving of £400,000, resulting in a total saving of £1.2 million.

The estate planning benefits of FICs do make them attractive, but not all companies are established for inheritance tax planning - some are focused on more immediate tax savings.

Example two: Richard

For example, Richard has £5 million cash to invest. He is 35, unmarried and has no children, so has no interest in estate planning. Richard pays income tax at 45 per cent, or 38.1 per cent on his dividend income. Richard could establish a company with say £50,000 share capital and lend the rest of his cash to the company on interest-free, repayable on demand terms.

The company then invests the cash in a portfolio of equities. Dividend income received by the company should not attract any corporation tax due to specific reliefs. Capital gains will benefit from indexation allowance and are subject to corporation tax at 20 per cent (reducing to 17 per cent in 2020). Richard can therefore roll up dividend income and gains at lower tax rates within the company, and extract capital by way of tax free loan repayments. Profits are ultimately paid out as dividends but Richard will control the timing and amounts paid. We tend to call this type of company a “personal investment company”.

Whether estate planning is your key objective or saving income tax, companies do provide some significant benefits. However, care is needed on how they are structured to make sure they do not fall foul of anti-avoidance legislation, resulting in unexpected tax charges. Not all companies are the same so, if you are attracted to the idea, you will need expert advice. Having a clear objective for the structure at the outset is the key to successful planning.
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