In this article, we highlight why Family Investment Companies (FICs) will help you protect your assets for your loved ones.
We will cover:
- What are Family Investment Companies?
- Why you should set up alphabet shares to retain control of the company
What’s a Family Investment Company (FIC)?
Many families and High Net Worth Individuals (HNWIs) are now using corporate structures as a way to secure their assets and make investments: these are known as Family Investment Companies (FICs).
They’re an alternative to a family partnership or trust.
There are many benefits to choosing a Family Investment Company.
Contrary to a settlement or trust, you generally don’t have to pay Inheritance Tax (IHT) when setting up a FIC.
Moreover, income and gains are subject to lower tax rates (Corporation Tax), which allows faster growth.
Corporation Tax rates are due to change from April 2023, though, as the main rate will increase to 25%.
Later on, it’s also possible to gradually shift control of the company, and therefore the family wealth, to the next generation with Inheritance Tax (IHT) benefits.
To do this, it’s ideal to separate income, capital and voting rights between share classes.
This way, you ensure that the younger generations have shares that have income and capital rights while the older generations have the voting rights.
Here’s a case study that illustrates a typical situation where an FIC may be useful.
In 2011, Joe and Claire sold their business for £5 million.
They set aside £1.2 million for themselves to supplement their pension income for their remaining years.
They use the remaining £3.3 million to provide for their children and grandchildren.
Their objective is to set something up which will make funds available to the family when needed, such as for school and university fees for the grandchildren.
They want to be able to invest and maintain the decision-making power on the strategic direction this will take.
Joe and Claire settle £662,000 into a Discretionary Trust for the benefit of their grown-up children and minor grandchildren (being their combined nil rate bands and two lots of annual exemptions).
They appoint themselves to be trustees initially.
They then set up an empty company, FIC Ltd, with just them as directors.
Setting up shares
Initially, they subscribe for 500,000 £1 Redeemable Preference Shares, and 100,000 Ordinary £1 A shares each, injecting the £1.2 million to which they wish to retain access.
Note that they could equally use directors’ loan account credits instead of preference shares.
Their articles contain specific provisions to require key decisions, such as the removal of directors, to require unanimous shareholder agreement.
Because shareholders do not have the right to participate in the running of the company, this means that Joe and Claire have effective control of the company as the only directors.
Next, they issue 662,000 ordinary £1 B shares which the Trust subscribes for.
Following this, they create equal tranches of 349,500 £1 C, D, E and F shares with most of the remaining funds.
They then gift the C shares and D shares to their son and daughter and the E and F shares to their grandchildren with the parents as the nominees for both minors.
They use the remaining £40,000 to pay a year’s fees for schools, etc.
The intention will be to pay dividends out to cover future fees.
The use of Alphabet shares allows you to pay dividends according to individual needs.
These transfers will be Potentially Exempt Transfers (PETs) for IHT and so fall outside the estate after seven years.
There are no CGT issues concerning the gifts as the company is empty and has no value.
There should be no Gift with Reservation of Benefit providing that Joe and Claire are no longer able to benefit from the shares which they gifted.
The retention of control of the investment strategy is a result of their being directors, not shareholders, and is not a reservation of benefit.
It does not enhance the value of their shares, which should enjoy a discounted valuation due to being minority shareholdings in their eventual estate.
The Family Investment structure gives them many advantages in terms of securing their assets, particularly in the form of money.
Companies receive most dividends tax-free and pay Corporation Tax on other types of income and gains.
The company could invest in buy-to-let property to generate profits, whilst seeking to realise gains or invest in shares or other market products.
Dividends can be paid to the nominees of the grandchildren to cover school and later university fees.
As this income is treated as their individual income, no tax will be payable up to the personal allowance.
The preference shares can be redeemed at par value i.e. £1 each as and when the money is required.
For Inheritance Tax purposes, the value of the preference shares, if any remain, will be included in the estate.
Ordinary shares will be subject to discounting because it’s a minority holding.
Thinking of setting up a Family Investment Company? At Tax Expert, we provide tailor-made tax planning for protecting your family assets.
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Kind regards Ilyas