The benefits of using a family investment company in your wealth planning
Corporate Tax Planning,
Personal Tax Planning,
Wealth Planning & Private Client
When you’re planning out the future stability of your family’s wealth, it’s important to consider both the legal structures you use to do this, and the long-term aims of your planning. Trusts and family investment companies are both useful options to be aware of, but it’s important to understand their different purposes and how they impact on your strategy.
Nicola Goldsmith outlines the differences between a family investment company and a trust and how both can factor into a holistic estate planning and wealth management solution.
Understanding how you use FICs and trusts
To achieve the best outcomes from your estate planning and wealth management, it’s important to look at all possible legal structures and how they can be used to your family’s benefit.
Family investment companies and trusts are two kinds of structures that are commonly used in planning. But what are the key differences between them?
- A family investment company (FIC) is a normal company that’s incorporated and limited by shares. The difference is that it holds investments instead of trading. The FIC is used to manage and control the wealth, property and investments held by the family.
- A family trust is a legal entity (not a company) that’s set up so that family members can benefit from an asset (or assets) without being its legal owner. Trusts can be used in their own right but they can also be part of your FIC planning.
A FIC will continue as long as the company continues to exist. A trust only lasts for 125 years. So, a FIC is better for very long-term planning. If you create the right classes or shares, a FIC will give you great control over your estate and wealth, and over a longer, multi-generational timeframe.
Understanding these key differences in legal structure and purpose is important, and it’s key to knowing when a FIC is appropriate and when a trust would be a better option, or whether both should be used together.
Who sets up a FIC and how are the shares allocated?
FICS are usually set up by grandparents or parents. People subscribe for shares to get money into the company, or they will put assets into the company by way of gift. Making gifts is not as common, as there are potential lifetime taxes involved.
You can create several different classes of shares within the company, and each will have different rights. Whoever sets up the company will usually hold shares bearing the voting rights and will usually be the directors of the FIC.
- Grandma and grandpa may set up the company and may sell a property, shares or cash to the company. They will have the A and B shares, usually. They will have rights to dividends and will have voting rights on who becomes directors, when the company is wound up and which classes of shares get dividend payouts made from the company and when. They will often have shares that bear dividend rights, and also rights to assets or value on winding up of the company. Sometimes the value of these shares is ‘frozen’, with the growth in the value of the company going into the other share classes.
- Their children may subscribe to the B shares or the C, D or E shares etc. They might have the right to income, to dividends and capital on a winding up, but will not usually have the right to vote. Control stays with the original shareholders and the people who set it up – and, for many people, that’s an important element of using an FIC; to stay in control of that wealth.
- F shares might go to grandchildren or to a trust for future planning. They may not have voting rights or rights to winding up, so their capabilities are limited, but they do benefit from the wealth that’s invested in the FIC. They are usually not able to sell the shares or to use them as security.
Many such companies are set up initially by parents, rather than grandparents, although the grandparents may acquire the F or another class of shares in the FIC and settle these into a trust for their grandchildren.
How can a FIC benefit the next generation?
First of all, any growth in the value of the FIC passes into each share class, so some of that growth immediately passes outside the estate. However, the shares can also be set up so that when the company reaches a certain amount of value, any growth above that hurdle can pass into the shares belonging to the children and/or grandchildren, not to the directors that set up the FIC. A FIC is an excellent way for grandparents or parents to pass on wealth to the next generation and take that growth outside their estates.
For example, £500,000 may go in, but the rise in the value above this will go to your children or grandchildren, not into your shares – the value of your shares will be effectively frozen. But you have control and none of the other shareholders do. Your kids can create other shares and trusts further along the line as and when needed, as the family evolves over time, providing flexibility over generations.
The design and details of a FIC will be bespoke to each case, especially the articles of the company and how things happen when there’s a divorce, death or someone goes bankrupt etc. Because of the way shares and rights are allocated, children can have wealth but can’t do anything with it. They don’t receive an income unless the directors vote dividends to them. They can’t cash it in and buy a Ferrari on their 18th! But it can also help protect pre-existing wealth when entering into a relationship, and that’s a primary reason for putting wealth into one of these structures – it adds a layer of security and control over this wealth.
Practical ways to make use of this wealth
A parent may set up a company with their children because it’s a sensible way to achieve growth for the next (and successive) generations. It’s like a trust, in that it protects assets, and that wealth can pass out of your estate, but you can continue to benefit from the income and gains generated, which is not the case with a trust without a tax charge!
If your child needs school fees and the FIC is able to pay dividends, then it may be possible for the FIC to pay for those school fees without tax charges arising. This would be the case where the children’s grandparents either gave them shares or set up a trust that held shares on the children’s behalf. This uses the child’s personal allowance, dividend allowance and possibly the basic rate band. An individual with no other income can receive £50,000 of income from a FIC or trust and pay as little as around £2,700 of tax on this income. This tax treatment wouldn’t apply if the parents gave the shares to the children, because the parents would be taxed on their minor children’s income (although it does work for university fees once the children reach the age of 18). In essence, using the FIC allows estate planning and managing an income for your children, all within the company structure.
If you had a million pounds in a FIC then you would expect that to double every 15 years or so. FICs are essentially a wealth-planning structure. In the past, there’s been the misapprehension that FICs were being used for unscrupulous means, but HMRC’s FIC unit was recently disbanded as it could find no evidence of FICs being used for tax avoidance.
Reasons for putting wealth into a FIC
We’ve seen that FICs are a secure and flexible way to manage your estate and wealth. But why would you choose to put your cash into a FIC rather than a standard savings vehicle?
Here are a few potential reasons:
- You might have a trading company with a lot of cash sitting in the company. A FIC is a good way to take that money out, loan it to a new company or restructure the group. You may be able to get it relatively tax and cost-efficiently into a FIC.
- You might have inherited a lot of money and want to look at securing this wealth for your children and their children. A FIC is an excellent way to put this cash into a productive legal structure and curate that wealth over successive generations.
- You might be looking at building a property portfolio and a corporate structure via a FIC may be better than personal ownership or a trust, especially with growth in the housing market at the moment and the rules restricting tax relief on interest payments.
Working closely with your family adviser
You're dealing with substantial amounts of cash when considering a FIC – it’s not usually cost-efficient to do for anyone with under £1million ready to invest. As such, it’s sensible to work closely with an experienced adviser who can give you the best possible guidance on which path to take.
As advisers, we’ll look at your family’s position holistically. For some people, a trust may be better than a FIC. Having misgivings about your family’s ability to manage money is not uncommon, so this is a good way to manage things and look at estate planning. You can also put more money into a FIC than a trust, so that can also be a factor in your decision.
By setting up a FIC, you are creating a company. As such, you do need to produce accounts, file with Companies House and pay corporation tax returns along with all the usual compliance. It’s probably more expensive than a trust in terms of getting the accounts done. There are costs involved, but the structure does force you to have up-front and honest conversations about money – and that’s where a good adviser can be invaluable.
Helping you set up and manage a FIC
Come and talk to us if you’re looking to work on your estate planning and wealth management.
At Haines Watts London, we have extensive experience of different family circumstances and wealth requirements. Every family is unique, there’s no ‘one size fits all’ answer to estate and tax planning. We offer a genuine one-stop shop for all your family and business planning needs, including looking after your planning, investment strategy and the legal compliance of your FIC.
Creating a FIC is part of a holistic estate planning and wealth management solution, so the time to act is now – protecting the future path of your family’s wealth management.
If you want the best for your family’s wealth, get in touch for a chat with our advisers.