Frequently asked questions about family investment companies

What is a Family Investment Company (FIC)?

A privately held company which holds investments rather than doing any kind of trading business. It is called a “Family” Investment Company, as usually all the shares are owned by members of a family, or Trusts set up for the benefit of that family.

What do Family Investment Companies normally hold?

Usually, FICs hold a mixture of cash, residential and/or commercial properties and/or investments, usually in listed companies. On occasion, FICs may also ‘own’ loans made to other family companies (often trading companies).

Who can set up a Family Investment Company?

Anyone who has money, property, or investments to invest, and would like to do so using a company structure. Often they will be used by business owners who are familiar with how companies operate.

How are assets added to a Family Investment Company?

This depends on the assets. Cash can be added by way of a share subscription, though this is unusual. More commonly, cash is added by way of a directors loan, so that the directors personally lend money to the company. Properties or investments can be transferred to a FIC, though this will usually give rise to capital gains tax implications and stamp duty land tax in the case of properties.

How can Family Investment Company shares be structured?

Often FICs will be set up with multiple classes of shares, each designated by a different letter of the alphabet. The different classes of shares can each have different rights to dividends, different capital rights (i.e. different capital amounts being due on the Company being sold or wound up), different voting rights, and different rights to appoint directors.

Who should own shares in the Family Investment Company?

Where shares have been set up with multiple share classes, often individual family members will own a different class of share each. These shares can be owned personally by the different family members, or in some situations they can be held in trust for them. One advantage of using multiple classes of shares in this way is that the directors may pay different amounts of dividends to the various family members.

How can Family Investment Company shares be passed down the family?

By way of lifetime gifts, or on death in accordance with the shareholder’s Will (or the intestacy rules if there is no Will in place). Shares can either be given outright to individuals or can be held on trust for their benefit.

What are the inheritance tax consequences or making gifts of FIC Shares?

If the shares have any value, they will be subject to the usual inheritance tax rules. This means that if the person giving away the shares survives the gift by more than 7 years, then there is no inheritance tax to pay. However, if they do not survive a gift by 7 years, then the gift could be subject to inheritance tax on their death, calculated on the value of the shares at the date of the gift. FIC shares left by Will form part of a deceased’s estate, and if the inheritance tax threshold is exceeded, will be subject to 40% inheritance tax on their market value.

What are the capital gains tax consequences on making gifts of FIC Shares?

Lifetime gifts of FIC Shares will be subject to capital gains tax if the shares have increased in value since they were acquired. This means that any gain will be taxed at 10% or 20% (based on the current rates) depending on the individual’s income tax band. Gifts on death are not subject to capital gains tax, as a person’s death washes away all capital gain. This means that the person receiving the shares (or the trustees) receive the shares at the date of death value.

What is the minimum overall value for a FIC?

There is no minimum value for setting up a FIC, though consideration should be given to the cost of setting it up as well as the annual administration costs involved in company compliance and reporting. Sometimes FIC are set up with a relatively modest amount, with the aim that further assets can be added later. Many advisors suggest that FIC are not particularly economical if the value is below £1m, but this is not a hard and fast rule.

Can Family Investment Companies help protect against divorce?

FICs cannot be ringfenced against divorce, but it can be difficult for the company’s assets to be used as part of a shareholder’s divorce settlement or civil partnership dissolution. Provision to help protect a FIC against relationship breakdown can be made in the FIC Articles, which restrict how shares can be transferred and also give a right for other shareholders to buy back the shares if they were to end up out of the family’s hands.

Pre or post nuptial agreements should also be considered. The consequence of these provisions is that the value of the shareholding may be limited in the event of divorce, which can protect against their forming part of a divorce settlement. For more information about family businesses and divorce see our recent article.

How can Family Investment Companies help with inheritance tax planning?

FICs can be structured so that different classes of shares receive different amounts of capital on a winding up. For example, classes of shares can be set up that only receive their nominal value, whereas other classes of shares can be set up which will receive all the future increase in the value of the company. This enables the future growth to be given away, so that it will not be subject to inheritance tax in the hands of the original Shareholder.

How are Family Investment Companies taxed?

Unlike trading companies, FICs are subject to inheritance tax on the full value of the shares. However, minority ownership discounts can apply, which take into account the minority owner’s lack of control over the company. For example, if a shareholder only owns 10% of the Company, a discount in excess of 50% may apply on the value of their shares (based on the net asset value of the company). This discount can be very useful for general family estate planning and can result in substantial inheritance tax savings.

What are the advantages of Family Investment Companies over Trusts?

There is usually no immediate tax consequence of adding large cash sums to a FIC, whereas trusts are usually limited to a person’s available nil rate band (currently up to £325k), otherwise immediate inheritance tax may be due.

If dividend income is to be retained within a (discretionary) trust, it would be subject to income tax, and further tax when paid out of the trust. However, if this income was retained within a FIC, it would not be taxed at all.

What are the disadvantages of Family Investment Companies over Trusts?

FICs are subject to double taxation when non-dividend profits are extracted (i.e. rental income for example would be taxed at the Corporation Tax rate — currently 19%, but 24% from next tax year 2023-24) and then taxed again at the dividend rate (currently 8.75%, 33.75% or 39.35%) when extracted from an FIC, whereas it would only be subject to the marginal income tax rates if paid out of a trust.

Companies, in particular limited companies, usually have higher compliance requirements than trusts, though usually both must submit tax returns.

Should I use a limited or unlimited company as a Family Investment Company?

Unlimited companies are often used for FICs, as they have lower Companies House reporting requirements, enabling details to be kept out of the public domain. In addition, with investment companies, the limited liability protection that limited companies provide is of little or no benefit. However, it may be worth noting that if it is intended that some or all of the shares are held in trust, then professional trustees may refuse to be appointed to hold an unlimited company. Otherwise, they would potentially be opening themselves up to unlimited liability, which could even arise without their consent, if the directors exposed the company to risk.

What are the ongoing administrative requirements of a Family Investment Company?

FICs, like other companies, have ongoing compliance requirements. Tax returns must be submitted each year, and accounts and confirmation statements filed each year with Companies House.

If I already have a Family Investment Company in place, can I make changes to the structure?

If the shareholders are all in agreement, they can change the company Articles of Association and restructure the shares. If they are not in agreement, it will depend on whether they have enough votes to do that under the existing Articles. For this reason, it is better to put changes in effect whilst there are few shareholders able to exert control, rather than after shares have been diluted by passing them down the generations to multiple family members.