A Family Investment Company (FIC) is a private limited company established to manage its wealth, preserve assets, and potentially pass wealth down to future generations through shares in that company. It is a planning structure that can be used to transfer value to the younger generations while allowing the older generations to maintain control over the assets even without creating an immediate inheritance tax (IHT) charge.
In this article, we discuss briefly about the Pros and Cons of Family Investment Companies. Additionally, we assess the broader pros and cons of implementing a family investment company, empowering individuals to make informed decisions about its suitability for shaping their family's future.
Advantages of Family Investment Company
Family Investment Companies (FICs) offer numerous advantages for individuals and families looking to manage and preserve their wealth.
These structures provide a range of benefits, including enhanced control, flexibility, and tax planning opportunities. Let's explore some of the advantages of Family Investment Companies:
1. Corporation Tax Savings
The donor usually funds the FIC with a loan that can be repaid from profits free of tax. Other family members are the shareholders, and often different classes of shares are created to meet the needs of different family members. Profits (once any loan is repaid) are taxed at corporation tax rates (19%/25%), which are often lower than personal income tax rates.
2. Inheritance tax savings
When shares are gifted, they are treated as a potentially exempt transfer, and so there is no immediate charge to inheritance tax. If the donor survives seven years, they will fall out of their estate for inheritance tax purposes.
3. Income tax savings
There are no restrictions on the class of assets in which the FIC can invest. Dividends on equities can be received by the FIC free of tax.
Income, usually paid in the form of dividends, can roll up tax-free inside the company, as no income tax is payable until income is paid out.
4. FICs and divorce
In the event of a divorce, the ‘corporate veil’ will not be pierced, meaning that if a divorcing spouse asks the court to transfer funds to them from the FIC, the court may refuse to do so.
5. Asset protection
By transferring assets into a Family Investment Company, individuals can separate their personal assets from their business and investment assets.
This separation helps protect personal wealth from potential risks associated with business activities, lawsuits, or creditor claims.
6. Control and Governance
Family Investment Companies allow families to retain control over their assets while involving multiple generations.
Through shareholding and directorship structures, family members can actively participate in decision-making processes and ensure the preservation of family wealth according to their shared vision and values.
7. Succession Planning
FICs provide a structured approach to succession planning, allowing families to pass on their wealth and values to future generations.
By establishing clear guidelines and governance mechanisms, FICs can facilitate a smooth transition of ownership and management, ensuring the family's legacy is preserved.
Disadvantages of Family Investment Company
While Family Investment Companies (FICs) offer several advantages, it's important to consider potential disadvantages as well.
Here are some factors to be mindful of when considering FICs:
1. Inefficient if all the profits are paid out
A FIC can be tax-inefficient if all the profits of the company are paid out to the family shareholders, as this can create the potential for double taxation.
At first, the company pays Corporation Tax on its profits, and secondly, the shareholders will have to pay Income Tax when profits are distributed in the form of a dividend to shareholders of FIC. The Family Investment Companies is thus more tax efficient if all the profits of the FIC are retained in the company.
2. Not effective if assets are transferred in the company
When assets other than cash are transferred into the Family Investment Companies, this may trigger a Capital Gain Tax charge, and if a property is transferred, this could also trigger a Stamp Duty Land Tax charge.
A transfer of cash is the best option to minimise the family’s tax exposure.
3. More administrative and expensive system
The cost of setting up the FIC and the ongoing administration, such as completing annual accounts, and Corporation Tax returns of FIC can make a FIC less attractive, and therefore, the Family Investment Companies is generally recommended for initial investments of more than £1 million.
4. Not suitable for families requiring regular returns
A FIC may not be appropriate if income from assets of FIC is required personally by the owners or founder or if the owner or founder is planning on regularly distributing the income of the company to their family members.
This would create negative tax implications, resulting in both corporation tax as well as income tax liabilities rather than if the asset was held directly by the individuals.
Family Investment Companies work best for those who invest substantial amounts of money, £1 million or more, and who are willing to retain their investment in the company to grow for the future rather than taking it out on a regular basis.
For a tax-efficient structure to hold and grow assets for future generations, the focus of a Family Investment Companies is mainly on investment and growth rather than the payment of dividends.
5. Potential Family Conflicts
FICs can exacerbate existing family dynamics and potentially create conflicts among family members.
Disagreements may arise regarding the control, distribution, or management of the company's assets. These conflicts can strain family relationships and impact the overall effectiveness and success of the FIC.
6. Lack of Privacy
FICs are subject to certain disclosure and reporting requirements, which can compromise the family's privacy.
Financial statements and other information may need to be made available to regulatory authorities, potentially exposing the family's financial affairs to public scrutiny.
Learn more about the benefits and drawbacks of family investment companies (FICs) in the UK, and how to set one up with the help of our specialist accountants.
In conclusion, Family Investment Companies (FICs) offer numerous advantages that can benefit families in managing and preserving their wealth. These advantages include enhanced control, asset protection, succession planning, tax efficiency, wealth consolidation, flexibility in wealth distribution, investment opportunities, and confidentiality.
However, it is essential to consider the potential disadvantages associated with FICs. These include the complex setup and ongoing administration, regulatory compliance requirements, risks of concentrated control leading to family conflicts, limited flexibility in capital withdrawal, tax considerations and changes in legislation, potential loss of personal ownership benefits, risks of family disputes and succession challenges, and reputational risks.
Ultimately, the decision to establish a Family Investment Company should be carefully weighed, considering the specific needs, goals, and circumstances of the family, and should be made in consultation with legal, tax, and financial professionals. Thoroughly evaluating both the advantages and disadvantages will help families make informed decisions about whether an FIC aligns with their long-term wealth management strategy or not.
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