From succession to separation

Family Investment Companies (FICs) have become a cornerstone of modern estate planning, offering families a flexible but robust way to manage wealth across generations. But what exactly is a FIC, how does it work, and what happens when divorce comes into play?

What is a FIC?

A FIC is a privately owned company, typically set up by parents to pass assets down the generations in a controlled and tax-efficient way. They’re increasingly used as an alternative to trusts as, unlike trusts, FICs don’t attract upfront inheritance tax charges on large gifts, making them a popular choice for long-term wealth planning.

The founders usually act as directors, retaining day-to-day control, while the younger generation become shareholders. This structure allows the older generation to manage family assets and gradually introduce the next generation to the responsibilities of ownership.

Unlike a trading company, a FIC holds investments. Most commonly these are stocks and shares, as dividend income from these is generally not subject to tax within the FIC and can be reinvested if not distributed. 

Funding a FIC

There are three main ways to fund a FIC:

• Cash gifts: Parents can gift cash to children or grandchildren, who can use it to buy shares. If the donor survives seven years, the gift is outside their estate for inheritance tax.
• Asset sales: Families may sell assets (such as property or shares) to the FIC. This can trigger capital gains tax or stamp duty but allows value to be transferred without an immediate inheritance tax charge. Tax reliefs may be available in some cases.
• Loans: The FIC can be funded by loans from family members, either interest-free or at a commercial rate.

Control and governance: keeping it in the family

A key strength of the FIC model is its flexibility in structuring both control and economic benefit. Founders typically retain control by holding voting shares and acting as directors, while other family members hold shares that provide income or capital rights but limited say in management. The company’s articles of association and shareholders’ agreement will reinforce this balance and often restrict share transfers.

Multiple share classes can be issued, with each family member holding a different class, either personally or via a trust. This allows directors to tailor dividend distributions to individual needs and adapt the structure as family circumstances change.

However, the flexibility of FICs does require careful structuring. Anti-avoidance rules are designed to prevent abuse, particularly where parents retain too much control or benefit from assets they have ostensibly given away. HMRC is paying closer attention to FICs, with new reporting requirements on dividends and shareholdings.

FICs on divorce: What happens?

One of the most pressing questions for families considering a FIC is what happens if a shareholder divorces. While FICs offer significant wealth protection (especially if combined with a prenup), they cannot be completely ringfenced against divorce. In particular, shares in a FIC will be included in the pot of assets divided on divorce.

At the heart of the FIC’s protective features is the “corporate veil”. This is the legal principle that a company’s assets belong to the company itself, not to individual shareholders. This means that the family court cannot simply order a FIC to hand over assets to a divorcing spouse. Provided the FIC was established for genuine estate planning reasons, the court will respect the distinction between company and shareholder. An exception to this rule is if the FIC owns the family home, but this is very unusual given how tax inefficient it is for FICs to hold residential property.

However, the shares themselves are personal assets of the shareholder and will be considered in the financial settlement. This is where careful drafting of the FIC’s constitution and shareholders’ agreement becomes crucial. Most FICs include strict share transfer provisions. Spouses of family members are usually excluded as shareholders to help preserve family control and provide asset protection on divorce.

If a shareholder divorces, the board often has the right to force a transfer of their shares (a compulsory transfer) usually at a price that reflects the shareholder’s minority discount. The company’s constitution may also reinforce this by giving the board discretion to buy back shares at a discounted price if a shareholder divorces. In practice, these provisions can significantly reduce the value attributed to a divorcing shareholder’s interest and serve as a powerful negotiation tool in settlement discussions.

These protections are only effective if the FIC is properly established with clear documentation and a genuine commercial purpose. If the court suspects that a FIC was created solely to defeat a spouse’s financial claims on divorce, it can disregard the structure and look through to the underlying assets. The court will expect full and transparent disclosure of the FIC’s structure, constitution, and financial position. Any attempts to conceal assets or manipulate the company’s arrangements after separation are likely to be challenged.

Practical tips for FIC founders

1. Establish the FIC for genuine estate planning and family governance, not to defeat potential claims on divorce. Keep clear records of the reasons for setting up the FIC.
2. Ensure the FIC’s constitution and shareholders’ agreement are robust, with clear share transfer restrictions and compulsory transfer provisions. Review these documents regularly as family circumstances change.
3. Avoid placing the family home in a FIC. If it’s included, seek specialist advice.
4. Be aware that shares in a FIC are likely to be valued at a discount in divorce proceedings, which can be a useful negotiation point. Use compulsory transfer provisions with care and legal advice.
5. Above all, be transparent. Concealing information can undermine the FIC’s protections.

While FICs cannot entirely shield assets from the effects of divorce, careful structuring can provide significant protection and peace of mind. As with any estate planning tool, the key to success lies in thoughtful planning, regular review, and seeking specialist advice tailored to your family’s unique circumstances.