Keeping it in the family: 6 key benefits of Family Investment Companies

With the preservation of wealth remaining a key priority for many families, we consider the key benefits of using Family Investment Companies (FICs) as a succession planning tool.

For many individuals who work hard to offer their family a bright financial future, implementing a tax efficient way of passing wealth down to younger generations can be challenging.

Many business owners and individuals will be aware of succession planning tools such as trusts, but may not be so familiar with Family Investment Companies which could offer additional benefits for their family’s future.

What are the key benefits of FICs?

FICs have a lot to offer as an effective tool to preserve wealth. As with all succession planning, it is important to consider what is most suited to yours and your family’s financial needs. The key benefits of using FICs to pass down wealth are:

1. Potential ‘Lifetime’ Inheritance Tax saving

Using a FIC instead of a trust could result in an additional tax saving. Gifts made to a trust, where you have already utilised your Nil Rate Band will be subject to an immediate IHT charge. Whereas gifts of shares, or cash to invest in a FIC made to an individual are not usually subject to an immediate IHT charge. Making gifts during your lifetime ‘freezes’ the value of that gift, any growth in that asset or investment will not be subject to Inheritance Tax, even if you pass away within 7 years of making the gift.

2. Dividends paid to a company

Dividends paid from a company to a company will usually be exempt from corporation tax.
This is compared to the maximum Income Tax rate on dividends for individuals, currently 39.35%.

3. Additional protection of family wealth

FICs enable ownership to be separated from control. Directors can retain control of the assets, investments and dividends. 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.

4. Tax saving on other income

The FICs other income will usually be subject to corporation tax at 19% (25% effective 1 April 2023). This offers a significant saving on the maximum Income Tax rate at 45%.

5. Profit extraction planning

The benefit to using a company structure is that no Income Tax will be suffered until funds are extracted from the company. This gives you more control and allows you to put in place a profit extraction plan.
In effect this will enable you to make full utilisation of yours and your family’s allowances and reliefs.
Profit extraction planning is a key part of implementing an effective FIC structure and should always be considered from an early stage.

6. Pension contributions deductible from corporation tax liability

FICs can use surplus cash to make employer pension contributions for directors or employees.
These contributions will be deductible when calculating the FICs corporation tax liability and would not normally give rise to an Income Tax liability.

Supporting you with FICs

Setting up a Family Investment Company can be complex process that requires consideration of your unique circumstances before implementing a structure. FICs are a highly personal form of succession planning and so we would always recommend seeking tailored advice in choosing the best options for you.

Our team of experienced tax consultants can offer pragmatic advice through every step of your succession planning journey. Whether that be structuring a FIC that’s right for you and your family or putting a regular review plan in place to ensure long-term results, speak to a member of our team today.