What is a Family Investment Company?

A Family Investment Company (FIC) is a private limited company designed to hold and manage investments on behalf of family members. The company’s purpose is to grow family wealth, reduce inheritance tax (IHT) exposure, and provide a clear governance structure for the family.

Why Set Up a Family Investment Company?

• Tax efficiency: A FIC is subject to corporation tax on profits, which can be lower than personal income tax rates. When profits are distributed as dividends, they are also taxed at a lower rate than salaries.
• Wealth preservation: A FIC helps prevent wealth fragmentation across generations by maintaining control within the family. By gifting shares in the company, you can manage how and when family members inherit wealth.
• Succession planning: A key advantage of an FIC is that it allows you to gradually transfer wealth to the next generation without triggering significant inheritance tax liabilities. This can be done by gifting shares, often at a discounted rate, or transferring them via a family trust.
• Control: Even as you transfer wealth, you can retain control over the company and its assets by keeping certain shares (e.g. voting shares) within the senior generation.
• Asset protection: Assets held within an FIC are protected from personal creditors, offering additional security for family wealth.

Step by step: setting up a family investment company

Step 1: Incorporate the company

The first step is to register your company with Companies House. This involves choosing a company name and appointing directors (family members or trusted advisors). You’ll also need to decide on the company’s registered office and shareholding structure.

Step 2: Create a shareholders’ agreement

A shareholders’ agreement is essential for defining how the company will be managed and how shares will be distributed or transferred. This agreement, which will work alongside the company’s articles of association, is critical to ensure smooth operations and avoid conflicts.

Step 3: Decide on investment strategy

Your FIC will need a clear investment strategy. This could involve investing in a diversified portfolio of stocks and bonds, real estate, or even private equity. The strategy should align with the family’s risk appetite and long-term goals.

Step 4: Structure the shareholding

Family members can hold different classes of shares in the FIC. For example, ordinary shares may carry voting rights and control, while preference shares might be issued to younger generations, granting them entitlement to dividends without giving them control. This allows the senior generation to retain governance while passing on wealth in a tax-efficient manner.

Step 5: Fund the FIC

Family members can fund the company through capital contributions or loans.

Tax Considerations for a Family Investment Company

1. Corporation Tax: FICs pay corporation tax on profits, which are made up of income and gains.
2. Capital Gains Tax (CGT): When the company sells assets, gains realised are taxed at the same rate as trading income.
3. Income Tax: When profits are distributed as dividends, they are subject to income tax, but typically at a lower rate than salary income.
4. Inheritance Tax: Gifting shares in the FIC is a way to reduce the taxable value of an estate, potentially lowering inheritance tax liabilities.

Conclusion

A FIC is an effective way to manage wealth and plan for the future. Offering flexibility in how wealth is distributed can help preserve family assets for generations. However, due to the complexities of tax laws and company structure, it’s crucial to seek professional advice from us (as well as accountants to structure the company efficiently from a tax perspective and financial advisors to help define an appropriate investment strategy) to ensure the FIC is set up correctly and efficiently.

If you would like any further information about Family Investment Companies or assistance in setting one up, please contact Manjot Shokar or any other member of the Geldards Corporate Team.