Wealth planning & Private client
For many families, making sure wealth is protected and passed down to younger generations is a key priority.
Family investment companies (FICs) can offer a tax efficient investment vehicle, and are often favored as a means to pass wealth down.
Last year, HMRC’s specialist unit was disbanded due to finding no links between tax avoidance and FICs, meaning that FICs will continue to play a key part in succession planning going forward.
However, setting up a FIC can be complex. It is crucial to consider all options and implications before implementing the structure.
It is also worth noting that changes to legislation can occur at any point, which can have a significant impact on the current structure of FICs. Regular reviews should be carried out with a lawyer and tax advisor to ensure that the structure remains effective.
What are FICs?
FICs are private companies established specifically to accommodate the needs (normally) of a single family, and they can provide a flexible estate planning tool.
The utilisation of a company structure enables the ownership to be separated from control.
The director shareholders (commonly parents or grandparents) will usually retain control of the company. In effect, parents or grandparents can control when and how younger generations can access and use investments or cash held within the company.
FICs are sometimes favored over trusts because they are more ‘user-friendly’. However, all estate planning options should be considered when identifying the best structure to meet your needs.
How do family investment companies work in practice?
For example, parents may wish to retain control of the FIC, whilst passing wealth down to their two adult children.
In some situations, this can be achieved by parents retaining more than 51% of the voting rights and becoming directors of the FIC. This allows the parents to retain control of both the FIC and its day-to-day management.
The parents could then gift cash to their children, which can be used to fund the purchase of preference shares and/or small amounts of ordinary share capital. This would allow the parents to control when and how their two adult children can have access to funds.
A key benefit of this structure is the ‘lifetime’ and ‘death’ IHT savings – this is just one example of how a FIC can be used in succession planning.
Who would use a family investment company?
FICs are popular amongst high-net worth individuals and family owned businesses who are looking to pass wealth on to future generations.
They are often favored over a trust where the parents (or grandparents) have fully utilised their Nil Rate Bands (£325,000), which would mean that further gifts to trusts would trigger a ‘lifetime’ inheritance tax liability (20%).
They can also offer a solution to owner managed businesses, where parents would like to take a step back from their current positions to allow the next generation to step in, but are not ready to hand over full control.
Are FICs right for you?
The complexity and cost of establishing a FIC can often be overlooked. Setting up a FIC can be a costly exercise involving solicitors, lawyers and tax advisors.
You should always consult with your tax advisor to consider whether your specific needs can be achieved through the implementation of the structure, the expected costs and any alternative structures which may be better suited to your personal situation.
Whilst FICs can offer an effective solution when it comes to succession planning, they do not always provide the optimum solution, depending on factors including income tax, inheritance tax, capital gains tax, stamp duty and your personal situation.
With all of this in mind, we would strongly recommend that detailed planning is carried out to determine if a FIC structure is right for you. Our specialist tax team are on hand to assist with the planning and implementation of FICs, or any questions surrounding them.