With the rate of corporation tax now at 20% and decreasing, holding income producing investments via a company (rather than personally) can be attractive. In addition, an investment company structure also offers a way of making an outright gift, whilst still retaining a degree of control – something which may appeal to clients looking to transfer part of their wealth to their children or grandchildren. Such companies are called “family investment companies” (or FICs).
What is a FIC?
A FIC is a private UK company holding cash or investments for a family, with family members as its shareholders. It is no different from any other UK company. What is special about a FIC, however, are the bespoke elements of its articles of association and any shareholders’ agreement, which define how specific family members will benefit in their capacities as shareholders with regards to voting rights, dividends and capital distributions.
How does a FIC work?
A FIC can hold any assets, for example, cash, a portfolio of shares, real estate or alternative investments such as works of art. “Control” can be separated from “economic value”.
In a typical scenario, parents incorporate and provide funds to a FIC. Subscribing for voting shares in a FIC enables the parents to retain control of investments and dividend flow through appointing and acting as directors of the FIC, and voting on shareholders’ decisions. A separate class of share (or several classes of shares with different rights for each child) can then be subscribed by the parents and gifted to the children. Such shares may be non-voting with restricted entitlements to dividends and capital. As such, the assets can be invested for the benefit of the whole family, with the older generation effectively controlling the investment strategy and distribution of profits.
Control and Protection
With the older generation retaining full or significant control, the FIC offers inheritance tax advantages of passing assets down to a younger generation whilst retaining a high degree of wealth protection, both to protect the funds from the financial immaturity of the younger generation and from being claimed by third parties in situations such as divorce and bankruptcy.
The FIC’s articles of association (a public document) and shareholders’ agreement (a private document) offer a bespoke structure that can be tailored to suit a family’s specific needs and concerns. Parents can include provisions in these documents to specify different classes of shares, restrictions on transfers of shares, voting rights, entitlements to dividends and capital. Further provisions can be included to restrict the powers of the FIC (for example, to invest only in particular asset classes) or to allow for specific purposes (such as purchasing a property or not to sell certain assets).
As with any other UK company, a FIC has to file certain documents which are publicly available at Companies House. These include:
- Articles of association (any sensitive matters can be included in the “private” shareholders’ agreement).
- Personal information (name, month and year of birth, nationality and country of residence) of directors and shareholders with more than 25% shareholdings in a FIC.
- Confirmation statement (previously called the “annual return”) with a statement of capital, full list of shareholders and officers of the FIC.
- Annual accounts for limited company (if the FIC is classified as a small company, only abbreviated accounts have to be filed).
If the family wishes to maintain financial privacy, an alternative is to use an unlimited company, which is exempt from filing annual accounts at Companies House. In this case, the shareholders would have unlimited personal liability for the debts and other liabilities of the FIC, albeit these may not be significant where the FIC is only holding investments, but not trading.
Tax on creation
If the FIC is funded with cash, there should be no immediate tax consequences. The gifts of shares or other assets in the FIC to family members will be “potentially exempt transfers” for inheritance tax (IHT) purposes, which mean there will be no immediate IHT liability. The value of the gifted shares will be outside the donor’s estate for IHT purposes, once the donor has survived seven years.
If assets standing at a gain are to be transferred into the FIC, this may trigger a capital gains tax liability. Transfer of stampable assets may also trigger stamp duty or stamp duty land tax.
Tax within the FIC
Most income or gains received by the FIC will be taxed at corporation tax rates, currently at 20%, decreasing to 19% from April 2017 and 17% from April 2020. Dividends received from other UK companies and most offshore companies will not be subject to corporation tax, and so may be received by the FIC tax free. FIC also benefits from indexation allowance, which is not available to trusts and individuals.
This means a FIC can offer a highly tax efficient method of rolling up income. The deferral of personal tax until a distribution is made can maximise the assets within the FIC available for reinvestment.
Tax at shareholder level
The only tax liability at shareholder level is on shareholder distributions made by way of dividend. There will be no additional personal liability for so long as any income or gains are rolled up within the FIC.
When distributions are made, the overall tax rates on dividends from the FIC are the same as if the dividends were received on the underlying shares held personally. The overall tax rates on other income are broadly similar to the usual personal rates. In both cases, the benefit is that tax may be deferred by delaying the declaration of any dividends from the FIC. The tax advantages of the FIC are certainly compounded by gross funds being available for re-investment within it, where the FIC is used for long-term roll-up.
Who are FICs suitable for?
FICs are not suitable for everyone, and careful consideration with regard to a family’s income and capital, as well as investment objectives, is required. That said, FICs are an attractive and flexible alternative to trusts, particularly with entrepreneurial clients who are used to operating with a company structure, and they are particularly tax efficient for clients investing in dividend-generating assets, with no need to withdraw funds in the short to medium term.
They are also appropriate for UK domiciliaries who are seeking to make controlled gifts in excess of their available nil-rate band, UK resident non-domiciliaries (RNDs) who are ‘deemed’ UK domiciled, and RNDs who are averse to the use of trusts or simply seeking a trust alternative.
Issues to consider
If a FIC suits the wealth planning strategy of your family, consider the following issues:
- Limited or unlimited company?
- Funding with cash, assets and/or a loan?
- Who will be the shareholders? Will they be “bloodline” family members only?
- What rights will each shareholder/group of shareholders have?
- Who should have voting rights?
- Who should be the directors?
- Any restrictions on the powers of the FIC?
- Any provisions for specific purposes?
- Is a shareholders’ agreement required?