Family Investment Companies: A Practical Guide for Families

Guest post introduction

Guest article by Lizzie Walters, Partner at Roythornes Solicitors

Family Investment Companies (FICs) are increasingly discussed as part of longer-term family wealth and succession planning. But what exactly is an FIC, who might benefit from one, and how does it differ from a family trust?

For this guest article, I’m delighted to welcome Lizzie Walters, Partner at Roythornes Solicitors, who answers some of the most common questions surrounding Family Investment Companies.

Lizzie looks at how FICs can allow different generations to participate in family wealth while providing flexibility over ownership, income and control. She also considers their role in inheritance and succession planning and some of the key differences between FICs and trusts.

As with any structure involving significant family wealth, legal, tax and financial planning need to work together. This article provides a useful introduction to the legal and structural considerations.

What is a Family Investment Company (FIC)?

A FIC is a company designed to act as a way for families to hold assets (including cash and / or investments) together. FICs are set up in the same way as any other company in England, however, their documentation will have bespoke wording that protects the interests of the family members and caters to their inheritance and succession plans. They can be used instead of, or often in addition to, family trusts to assist with managing family assets.

In addition to bespoke articles, a FIC generally is set up with different classes of shares tailored to the family’s needs. This means that matters such as dividends and capital can be separately controlled for each class, generally for the purposes of leaving the older generation’s shares with a reduced value and passing future growth value on. Voting rights can also vary across the classes of share.

Why use a FIC?

Placing assets into a company structure allows for multiple generations of a family to be involved in the management of the assets (if desired) and to receive financial benefits from those assets. It creates a single investment pool whilst maintaining flexibility in terms of who should have an income stream and who should hold the value of the underlying assets. A FIC also allows the person setting it up to retain a right to share in the growth value, an income stream and / or decision-making. This can be quite different to setting up a trust arrangement on its own.

The articles of association of the company can help control when and where the shares in the company can be transferred. By preventing shareholders from selling without permission and making sure that on divorces, for example, the shares have to be transferred back to the company, this can prevent ownership from being diluted.

They can provide an opportunity for inheritance tax planning, whilst retaining control and / or some access to underlying investment assets.

 Who would a FIC work for?

A FIC could be used by any family who wished to structure their assets using a corporate, but they can be particularly useful for higher net worth families looking for longer term investment and planning. Typically we see FICs as the vehicle of choice for those who are familiar with the operation of companies, but this prior experience is not an absolute requirement.

FICs work well where the investment value is to be kept together in the long term and where flexibility is required in terms of ownership and income.  They often work best for those with liquid assets, be that cash or investments which can easily be transferred. Individuals who hold existing property assets, for example, can also benefit from using a FIC but the set up costs and tax charges tend to be more and more planning is needed.

FICs also give significant benefits to those who envisage a material income stream from the assets they hold, even if those assets have a comparatively low capital value. In those cases it can be beneficial to pass that future growth value (i.e. the right to the income stream, or part of it) on to future generations without losing control on how that income stream is spent or distributed.

I already have a company – can it become a FIC?

As a FIC is essentially a company which holds investments and is owned by a family, if your company does these two things you have already got a FIC. However, it is possible to change an existing company to create a more traditional FIC structure with different share classes so that others can benefit from future growth and / or control can be kept by certain individuals. If using an existing company it is especially important for full tax advice to be given to determine the most effective manner of restructuring, but in short, a FIC does not need to be a brand new company.

How does A FIC compare to a trust?

Both allow a split of ownership and control and both allow flexibility in terms of family ownership and both have their place in terms of succession planning. Indeed, and as above, we would often see the two being used in tandem.

The tax position is the key difference. Inheritance tax can be the big difference with a trust potentially being required to pay a 6% charge every ten years (on amounts above the relevant nil rate band), but also inheritance tax can be payable on the introduction of assets into trust. Often FICs are used to pass sums to other family members, in the form of a transfer of shares, which is not subject to the same immediate inheritance tax charge, but control is given through the FIC mechanism to prevent the transferee doing whatever they like with the value.

Similarly, the ongoing tax treatment can be beneficial in a FIC where income is taxed at corporation tax rates and where dividends may be received tax free. Comparing this to a trust there can be a tax saving if funds earned from the investment assets are to be reinvested.

Lizzie Walters

Partner

Roythornes Solicitors

lizziewalters@roythornes.co.uk