Family investment companies (FICs) have emerged as a significant and sophisticated tool in the context of wealth management and succession planning for high net worth (HNW) families. These bespoke corporate structures are specifically formed to hold and manage investment assets for a single family, serving as an instrument for managing wealth succession and facilitating estate planning.
Key features and benefits of FICs
At its core, a FIC is a private limited company where family members are shareholders, and the company itself owns and manages the investment assets. One of the key characteristics of a FIC is its highly customisable nature, allowing for a tailored approach to suit specific family needs and objectives. This flexibility extends to the shareholding structure, which can be designed to allocate different rights and benefits to various family members or generations.
Most FICs are incorporated in England and Wales and registered at Companies House. While offshore FICs can be used for non-UK situs assets, they often remain UK tax resident. It is also possible to incorporate FICs as unlimited companies to benefit from enhanced privacy, as these are exempt from filing detailed accounts at Companies House. However, for FICs holding property or engaging in higher-risk activities, a limited company structure is generally preferable.
Control is also a crucial aspect of FICs, with the founding generation typically seeking to retain control while spreading ownership. This control can be managed through various mechanisms, such as creating a class of shares with enhanced or all voting rights, retained by the founders or placed in a trust.
Alternatively, directors' powers can be enhanced through bespoke articles of association and shareholders' agreements. Family members often manage the FIC, with the board of directors usually comprising family members, and the appointment and dismissal of directors are tightly controlled through constitutional documents.
The share structure of FICs is often complex and tailored to the family's needs. 'Alphabet shares' – different classes of shares with varying dividend rights – are commonly used to allow for flexible income distribution among family members. This approach enables precise and adaptable income allocation, addressing diverse financial needs across generations or branches of the family. Capital rights can be equal across all shares or differentiated to allow for value freezing or enhanced growth for certain generations.
Tax efficiency and financial advantages
FICs primarily hold investment portfolios or property interests and may serve as funding facilities for other family entities. One of the attractions of FICs is their tax efficiency. Operating under corporate tax rules, FICs can offer advantages over personal tax rates in certain circumstances.
Corporation tax rates are generally lower than higher-rate income tax, potentially allowing for more rapid wealth accumulation within the structure. Furthermore, most UK and non-UK source dividends received by the FIC are exempt from corporation tax, enabling tax-free reinvestment. It's crucial to note, however, that extracting profits from a FIC can result in double taxation, as dividends distributed to shareholders may be subject to both corporation tax and personal income tax on dividends.
Estate planning and succession benefits
FICs can also offer significant benefits in terms of estate planning. Initial funding can be gifted to younger generations as a potentially exempt transfer for inheritance tax purposes. Shares can be gifted to trusts, potentially utilising holdover relief for capital gains tax. Upon a shareholder's death, their shares may attract a valuation discount for minority interests. The structure allows directors to retain control over dividend payments and investment decisions can help preserve capital for future generations and introduces governance into family wealth management.
Setting up and managing a FIC
Setting up and managing a FIC involves careful consideration and planning. The process can involve either incorporating a new company or converting an existing one. Bespoke articles of association are crucial for aligning the company's structure with family objectives. Initial funding can come from share subscriptions, subsequent share issues, or loans, each with different implications for control, tax, and future wealth extraction. Loans to FICs require particular care due to potential inheritance tax and anti-avoidance issues, although commercially structured loans with interest can be a tax-efficient method of profit extraction.
Potential drawbacks and considerations
While FICs offer numerous benefits, they also come with potential drawbacks and considerations. The complexity of these structures necessitates ongoing professional management, and the initial setup involves legal and administrative costs. FICs must adhere to corporate law and regulations, which can be more complex than personal financial management. The potential for double taxation on distributed profits and the inflexibility for personal use assets are also important factors to consider.
Role of professional service providers
Given the complexity of FICs, many families rely on corporate service providers for support in establishing and managing these structures. These services typically include company formation and structuring, tax planning and compliance, company secretarial services, governance support, administrative and accounting support, regulatory compliance assistance, succession planning and next-generation education, and ongoing review and optimisation.
Staying informed: regulatory and tax considerations
The regulatory environment surrounding FICs is subject to change, and families should stay informed about relevant legal and tax developments. While HMRC's specialised FIC investigation unit was wound up in 2021, potential challenges remain, particularly regarding interest-free loans and share valuations. It is important to remember that potential future changes in tax rates and regulations may impact the efficiency of FICs.
FICs offer a sophisticated approach to wealth management and succession planning for high-net-worth families. They can provide potential tax efficiencies, flexible control mechanisms, and a structured framework for long-term family wealth management. However, their complexity necessitates careful consideration and ongoing professional management.
The decision to establish a FIC should be based on a thorough analysis of a family's specific circumstances, long-term objectives, and potential alternatives. Professional advice from legal, tax, and corporate service experts such as Hawksford is essential in determining whether a FIC is an appropriate structure and in ensuring its effective implementation and management. As with all financial structures, families considering or operating FICs should remain vigilant and adaptable to the evolving regulatory and tax landscape to ensure their chosen structure continues to meet their objectives efficiently and compliantly.
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