The primary objective in setting up a FIC is to transfer wealth for inheritance tax purposes to the next generation or perhaps even a subsequent generation, whilst retaining control over that wealth.
However, when transferring large amounts of wealth, control is never the only benefit that people seek from an arrangement. There are always other criteria that are either considered "must have" or "desirable".
A Brodies Family Investment Company is able to help deliver all of these criteria when transferring wealth down the generations.
As indicated above, this is part of the primary objective. Brodies' preference is to use trusts to own the FIC which means that control can be exercised by the clients, both as a director of the FIC and as a shareholder (technically as a trustee of the trust that is the shareholder).
Given the possible longevity of the FIC, flexibility is very desirable and is achieved in a number of ways:
• Flexibility around what you can invest in e.g. some structures are not suitable for investment in direct equities.
• Flexibility around who benefits e.g. in the case of grandchildren, not all the grandchildren may yet be born so having the ability to add grandchildren as beneficiaries of the structure is a considerable advantage.
• Flexibility around when and how they benefit e.g. some structures require all beneficiaries to benefit equally, but the Brodies' structure allows family members to benefit at different times and by different amounts.
Access to funds for retirement
Often this planning is implemented on the sale of a business and the clients wish to retain access to funds for their retirement. That is possible using a Brodies' FIC.
The FIC is owned by a trust for the benefit of the next generation and that affords a layer of asset protection. The FIC is funded by a loan and some or all of that loan may be gifted to the next generation. In Scotland that is an inherited asset that does not change form and so does not form part of the matrimonial pot. The position in England and Wales is not as clear cut.
Having accumulated this wealth, families rarely wish to publicly share details of how much they are worth. The ability to invest privately is often a "desirable" and this can be achieved with a FIC.
Clients often ask, "Do the children need to know at this stage?", the thinking being that the children (or grandchildren) will be made aware of funds being invested for them in due course but, for now, it would be better that they do not know about this wealth until they are ready. Because the children are not shareholders in the FIC, they do not need to know anything about the funds invested.
Increasingly, couples have children from previous marriages and relationships. In these circumstances, it is possible that on the first death, the children of that person might claim their legal rights and impact planning that has been put in place by their parent to protect assets. Where equity is built up in a FIC, that equity may be used as a means to persuade a child that their interests are better served by allowing their parent's planning to flow as planned.
The tax efficiency of a FIC would justify a note in itself, but this focuses on four specific points.
1. The FIC is funded by a loan. The loan does not increase in value so this arrangement freezes the value of the clients' estates in relation to this sum. This means that their IHT position ceases to get any worse.
2. The funds are then invested and all growth on that investment now arises outside the clients' estates. That growth is never part of their estate and is never subject to IHT.
3. Clients agree a strategy to reduce the value of that loan in their estate either by drawing down that loan or by gifting that debt to others (or a combination of both).
4. The current, low rates of capital gains tax are encouraging people to consider selling their investment portfolios to FICs and accepting capital gains at current low levels in the expectation that this will save capital gains in the future at higher rates. This, combined with the IHT savings above, can lead to large tax savings.
Reasonable tax planning
The use of FICS has grown considerably in recent years and resulted in HMRC setting up a unit to investigate the structures used and the motivation behind their creation.
However, that unit was closed in 2021 with HMRC stating that they were satisfied that FICs were not being used for abusive purposes and that FICs would now be looked at within the same framework as any other companies.
This is very much seen by advisers as a signal that FICs are not considered aggressive and are a reasonable means of estate planning.
In terms of cost, every FIC is bespoke because they are used where significant wealth is held but that sort of wealth is always held in different ways by each client.
While the structure is broadly similar in each case, it will vary according to the value being transferred to the FIC, the circumstances of the family and the clients' wishes. As a result, the price will change, but to provide a guide, the starting price for cash of £2m and 2 children is £15,000 plus VAT plus outlays.