Posted: 24 / 08 / 2023

Article by: David Evans, Head of Private Clients

 

Many entrepreneurs will often reach a point where they wish to start sharing their wealth with other family members. This could involve assisting their children or grandchildren in purchasing homes or initiating their own business enterprises.

Nevertheless, it’s common for accomplished entrepreneurs to feel hesitant about surrendering authority over the assets they painstakingly cultivated, or they may consider that the children or grandchildren are not yet old enough to take on the responsibility.

Using a family investment company is one way to facilitate this.

What is a Family Investment Company?

A family investment company (FIC) is a UK company, the shareholders in which are family members, which exists to make or hold investments. Those investments typically comprise cash, loans, residential or commercial properties and share portfolios, generally held to generate income, capital growth, or a combination of the two.

How are they different to a normal limited company?

Most trading companies are initially set up with a small amount of capital to limit the shareholders’ liability. Sometimes, this may just be one £1 ordinary share held by each of the founders.

However, a FIC is likely to find it necessary to establish distinct categories of share capital to guarantee that control over voting remains with the older generation, while dividends can be directed to younger family members whenever they require income. Typically, the primary (voting) shares would be owned by the senior family members who generated the wealth, and the younger family members would hold varying types of non-voting ordinary shares.

Usually, to ensure that shares are retained within the family across future generations, the Articles of Association will contain provisions that mean that if a shareholder wishes to dispose of their shares, they must first be offered to other family members.

What are the potential benefits?

To allow you to keep control over the assets in the company, you can be named as a director and be a preferential shareholder, so you have all the voting rights but, importantly, no rights over the capital. By taking this approach, as long as you keep no beneficial interest in the company, then after seven years, the value of the money or property transferred will fall outside of your estate for inheritance tax purposes.

There are also other tax advantages, including relief for interest paid on mortgages and the fact that your investments will be subject to the lower corporation tax rate rather than the higher rate income tax.

Unlike trusts, transferring assets in excess of £325,000 into a family investment company is not subject to the initial inheritance tax charge of 20%. This makes a FIC an appealing option for people who want to transfer funds over £325,000 to their children whilst maintaining control of those funds.

What are the potential downsides?

As with all tax planning, there is always the risk that the Government will change the law to remove the current tax benefits of using a FIC.

Bear in mind that putting a property into the company rather than cash could result in capital gains tax, and there is potential stamp duty to consider. If you plan on regularly distributing the company’s income, this would have a negative tax implication. The only way to get money out is through dividends, resulting in you paying both corporation and income tax, which would be higher than if the asset was held directly.

Finally, FIC’s can also be costly to set up, given the inherent complexity of the share structure.