A Family Investment Company is a business that can be used to pass wealth down through generations while maintaining control over it.

A common use of a FIC is where older generations, such as parents, wish to make a generous gift to the younger generation, such as their children (either adults or minors) while remaining in control of the investment strategy of this gift. This can be attractive to parents who will have the option to phase a gift to children and control when and how much of this gift their children should receive. In the past, a trust would have been used for this. However, changes in tax trust rules made using a trust a less attractive option, in the majority of cases, gifts valued over £325,000 incur a lifetime Inheritance Tax Charge.

The structure of a FIC is set up so that the majority, or all, of the voting sits with the parents but the businesses future growth and value sits with the children. This is provided the parents survive the 7 years from creating the FIC, the majority of the value held within the FIC does not form part of the estate for Inheritance Tax purposes. On a transfer of £1 million, something in the region of £400,000 in IHT can be saved, while also retaining control over the £1 million.

Are there other advantages?

Another tax advantage of a FIC is that the investment returns are subject to lower levels of tax that apply to companies at present. The headline rate of tax for income and gains in a company is 19%, while the highest of personal tax rates is 45% and 28% respectively and 38.1% for dividends. The majority of dividend income that companies receive is non taxable unless and until it is dispersed to shareholders.

The financial advantages of reinvesting gross income (£10,000) instead of net income (6,190) can be significant in the long term, however, this can also mean that more income is available to pay out to the children, if this is desired, if some of the received dividends are reinvested.  This is the reason that businesses can (and are) used as an investment vehicle, irrespective if objections to pass wealth to the next generation.

In addition, administration and management fees, for example, investment management and tax reporting are often deductible against income for corporation tax purposes, these expenses are not relievable for individuals.

Is now a good time?

From a tax perspective, yes, there are two key reasons and these are linked to two specific taxes:

  • Capital Gains Tax (CGT)

If you wish to fund an FIC with non-cash assets, then upon a transfer of assets standing at a profit, then can prompt capital gains tax charge subject to the availability of the annual exemption.

However, in a depressed market, this can present opportunities to transfer non-cash assets, eg shares and stocks, which in the past have stood at a gain, into a corporate tax efficient package like a FIC, without realising prohibitive capital gains tax charges in this process. This can also present an opportunity to utilise formerly realised capital losses to offset against gains realised on a transfer of other assets standing at a gain to a FIC.

  • Inheritance Tax

Should an individual die within seven years of making a gift, the value of this gift is in their estate for Inheritance Tax purposes. The value is then brought into account at the value of the gift at the date of the gift rather than the date of the death. Gifts during a time of lower value give less IHT value. Any value growth from the date of the gift is removed from the donor’s estate, this is provided that they cannot value from it personally.

Summary

A FIC is a company that has a specific purpose, they can be used to meet several wealth planning objectives and are able to be structured accordingly. However, in general they have different “constitutions”, for example standard trading companies and different aspects should be considered. Therefore, specialist input is required when these are established.