Is a Family Investment Company Right For You?

If you are over 50 and own significant assets, such as property, shares, or other investments, an FIC can help you manage these assets more effectively. It allows you to retain control over your investments while starting to think about your estate planning.

Families with considerable wealth often have more complex financial and succession planning challenges. An FIC can simplify these processes by providing a clear structure for managing and distributing assets. It’s also a flexible structure that can be added to over time.

An FIC can offer various tax advantages, particularly around inheritance tax. By transferring assets into an FIC, you can potentially reduce the amount of inheritance tax payable, ensuring more of your wealth is passed onto future generations. It’s also possible to reduce or avoid other taxes like income tax, capital gains tax, and stamp duty.

An FIC allows for the gradual transfer of wealth and responsibilities to younger family members. While the senior generation can maintain control through directorships, younger members can become shareholders, learning about asset management and investment strategies. This can help make sure they are ready for the responsibility of managing the assets when the time comes.

As you can see, the applications for FICs are wide, which is why it’s an important consideration for our clients.

Lower Tax Rates – The profits generated by an FIC are subject to corporation tax, not personal income tax. At between 19% – 25%, corporation tax is currently lower than the higher rates of UK personal income tax, which can be up to 45%. This can mean significant tax savings, especially for those in higher tax bands.

Deductible Expenses – Employee expenses, including directors’ salaries, can be deducted from the company’s profits before calculating corporation tax, as can expenses like mortgage interest on real estate assets. 

An FIC allows for a more tax-efficient transfer of wealth to the next generation. By gifting shares in the company to family members, you can reduce the value of your estate and, consequently, the potential IHT liability. Normal gifting rules apply on these shares, so it’s important to seek professional financial advice on how best to make these gifts.

Shares in an FIC can be structured so that they fall within the nil rate band (currently £325,000 per person or £650,000 for married couples), potentially avoiding IHT altogether.

Assets sold within the FIC are subject to corporation tax rather than personal CGT, often resulting in a lower tax rate on capital gains. This also avoids the capital gains tax surcharge that’s levied on real estate.

When selling property, the buyer of the property owned by an FIC may also pay less Stamp Duty Land Tax (depending on the structure of the sale), making it more attractive and potentially leading to higher sales prices.

While not a specific tax that can be reduced, the flexibility of dividends can provide substantial tax advantages for FIC shareholders.

Specifically, shareholders can receive dividends with a tax-free allowance. For UK residents, the first £1,000 of dividend income is tax-free (reducing to £500 in 2024/25). Even if above these amounts, tax rates on dividends are lower than the equivalent personal income tax rates.

For non-UK residents, there is no UK dividend tax on dividends received, allowing for tax-efficient income extraction. It’s worth noting that there may be tax payable on these dividends in the country of tax residence.

Trusts – Trusts are managed by trustees who have a legal duty to act in the best interests of the beneficiaries. While those who set up the trust (the ‘settlor’) can maintain control over the funds as trustees, they have more limited scope to access the assets themselves, as that isn’t likely to be in the best interests of the beneficiaries.

FICs – In an FIC, the senior family members usually retain control as directors, but can also be shareholders of the company. As well as options such as providing the initial assets as a director’s loan, provides more flexibility for the older generation to access funds than a trust. At the same time, it still retains the ability to pass assets and income to the younger generations.

Trusts – The tax benefits of trusts have been eroded over the years. Trusts have no personal allowance, and are charged income tax at a rate of 45%. Distributions paid out to beneficiaries come with a rebate which can claim some of this back, based on the beneficiaries own tax rate. 

Capital gains tax is also charged on trusts assets. The full tax rules on trusts are very complex, but the short summary is that trusts are often not much more tax efficient (if at all), than simply holding assets in personal names.

With that said, gifts into trust start the 7 year clock for gifts from an Inheritance Tax (IHT) perspective, which makes them a worthwhile option to consider if reducing IHT is a key objective.

FICs – FICs benefit from corporation tax rates on profits. At the current rate of 19% – 25%, company taxes are generally lower than personal income taxes. Dividends can be distributed to shareholders, who may benefit from tax-free allowances and lower dividend tax rates. 

As mentioned earlier, there are a range of additional tax benefits to FICs, including potentially lower levels of stamp duty on transactions, and no separate capital gains tax.

Inheritance tax can also be minimised by gifting shares in the FIC to family members, in a similar way that gifts can be made into trust.

Trusts generally have lower setup costs compared to FICs, but ongoing administrative costs can be higher due to the need for professional trustees and compliance with trust regulations.

Trusts – Trusts provide a clear legal structure for passing assets to beneficiaries, often used for protecting young or vulnerable family members. However, the rigid structure can limit flexibility in how and when assets are distributed, and the assets generally can’t be paid back to the settlors.

FICs – FICs allow for gradual wealth transfer through shareholding, making it easier to manage succession planning. Shares can be gifted over time, reducing inheritance tax liabilities and ensuring a smooth transition of wealth.