Clare Armitage
- Partner
- Private Client
Family Investment Companies: a practical tool for long-term wealth planning
Family Investment Companies (FICs) are becoming a popular wealth‑planning structure for commercially minded families who wish to retain control over family assets while passing long‑term economic value to the next generation.
What is a FIC?
Broadly, a FIC is a bespoke private company which is usually set up to hold and invest assets as part of a long-term estate and succession plan. Due to the Inheritance Tax (IHT) restrictions on the amount of assets that can be transferred into trust during a person’s lifetime and the associated ongoing tax charges that apply to most trusts, many families are turning to alternative structures such as FICs to facilitate the transfer of their wealth to the next generation.
FICs pay corporation tax rates (currently 25%) on investment returns and can benefit from certain tax deductions, which makes them generally a more tax efficient vehicle for long-term investment growth than individual or trust holdings. However, consideration needs to be given to the extraction of profits from the company as individual shareholders will still pay tax on dividends and/or capital distributions received.
Funding a FIC
The typical structure of a FIC places parents at the centre of control. Parents capitalise the company, most commonly with cash and by way of an interest‑free loan and/or by subscribing for particular classes of shares. The FIC will then invest those funds, often in an equity heavy portfolio. Whilst other assets could instead be transferred to the FIC, this will require careful thought and could trigger a capital gains tax (CGT) or have other tax implications unless relief is available.
While the immediate IHT benefits in parents seeding a FIC by way of a loan are limited, as the right to repayment of the loan balance is an asset of their estates for IHT purposes, the structure remains flexible and provides IHT mitigation opportunities for the future. For example, once the loan proceeds are invested, the shares in the FIC are usually structured so that future capital growth will be outside of the parents’ estates. Parents can draw down on the loan, free of income tax and CGT and use the funds as they wish. Alternatively, they could gift their right to repayment to the next generation at a later date. Such a gift would constitute a potentially exempt transfer for IHT purposes but, provided the parents survive the gift by seven years, the value of the loan would no longer be within their estates and subject to IHT on death. With careful structuring, a FIC can therefore be established in a tax effective way, while still allowing parents to access to capital.
Retaining control
The ability for parents to retain decision‑making control is achieved through the company’s board structure and tailored share rights. Parents typically act as directors and chairpersons of the board, with the company’s constitutional documents entrenching their position. Although day‑to‑day investment decisions are often delegated to a professional investment manager, the board ultimately determines if, when, and to whom profits are distributed. The family’s specific objectives can be reflected in the FIC’s articles of association and, where appropriate, a private shareholders’ agreement.
Distributing growth
The share capital of a FIC is highly flexible and can be divided into multiple classes with different rights. Commonly, parents hold voting shares carrying little or no economic entitlement, thereby preserving control but ensuring any value of the FIC that is within their estates for IHT purposes is kept to a minimum. Children may hold shares with rights to dividends and capital growth but no voting rights, ensuring that future value accrues to the next generation while control remains with the parents. Additional share classes may be issued to the trustees of a family trust, providing asset‑protection benefits and allowing minors or vulnerable beneficiaries to benefit without owning shares outright.
For a more detailed discussion of the commercial advantages and disadvantages of FICs, please see our earlier article: Why should entrepreneurs consider a family investment company (FIC)? – Wedlake Bell
Considerations
FICs offer advantages such as long‑term investment consolidation without the ongoing IHT charges to which most types of trust are subject, but they still have their own tax considerations and involve initial and ongoing administration costs, together with company compliance obligations.
As with any family wealth structure, FICs are not a one‑size‑fits‑all solution. Specialist tax and legal advice is essential to ensure that the structure is appropriate, robust and aligned with the family’s long‑term objectives.
How we can help
Our private client and corporate teams work closely together to assist clients wishing to establish a FIC. Together we can help:
- assess whether a FIC is the right solution, taking into account the family’s commercial mindset, governance priorities and succession plans;
- advise on the most effective way to establish the company, including capitalisation, share class design and funding arrangements;
- design bespoke constitutional documents, including articles of association and shareholders’ agreements, to embed decision‑making control, manage distributions and reflect the family’s values and objectives;
- advise on board composition, voting rights and delegated investment authority, helping families balance oversight with professional investment management; and
- provide ongoing support to ensure the FIC operates smoothly and remains fit for purpose as circumstances evolve.
Should you wish to find out more information about FICs, please contact a member of the private client team.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
Meet the team:
Claudia Cinzia Hobbs
- Solicitor
- Private Client