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Thinking of setting up a family trust? Think again… A Family Investment Company Could be More Effective

on Wednesday, 02 September 2015.

Trusts have been widely used as a method of holding family wealth and passing it to the next generation. However, recent tax changes have made trusts a less attractive option.

In this article we explore the attraction of family investment companies (FIC) and the reasons why you may wish to consider using an FIC as part of your family's succession planning.

What is an FIC?

An FIC is simply a private UK company that is used to hold family investments as an alternative arrangement to a trust. Typically the company is set up using surplus funds from one or more family members (donors). The funds are then invested and any growth achieved is then reflected in the value of the shares owned by the wider family.

What are the benefits?

  • Timing of tax liability
    Company income and gains are taxed at the corporation tax rate of 20%, as opposed to a potential 45% (for income over £150,000), and the family shareholders are only taxed when these are distributed.
  • Certainty and control
    The donor can still retain some element of control over the company provided that the articles of association are carefully drafted.
  • Flexibility
    Ownership of the company can be passed gradually over time to the next generation by the gifting of shares.  
  • Ease of investment
    The investment of cash into the FIC by way of a loan should have no adverse tax consequences. The loan can be repaid by the FIC at any time with no tax implications.
  • Ability to gift shares
    If a family member wishes to gift their shares in the FIC, there will be no immediate inheritance tax charge as the gift will be deemed a potentially exempt transfer. There will also be no future tax consequences provided that the benefactor survives more than seven years from the date of the gift.
  • Tax efficiency
    Provided that the funds are retained within the business, there will be no further tax payable on such funds.

With only around 30% of family businesses passing to the second generation and around 10% passing to the third, succession planning is something all family businesses should actively engage in as early as possible. A clear and well thought out succession plan is a key factor in ensuring the longevity of your business and encouraging engagement with the next generation.

FICs may form a useful tool as part of your wider succession planning.

Want to know more?

An FIC can be an efficient and flexible way to manage and grow your family's wealth.

If you would like to learn more about FICs and how they may benefit to your family business, please contact our tax consultant Ann Farquhar on 0117 314 5620.

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