A Family Investment Company vs Trust is a practical consideration when choosing the best way to manage family wealth and assets in the UK.
While both structures offer benefits and drawbacks, choosing between them requires careful consideration and understanding of their key features.
In this guide, we’ll explore the differences between FICs and trusts including what they’re for, how they’re taxed, and practical considerations.
We will cover:
- The main differences between a Family Investment Company vs a Trust
- How you could benefit from both
Trusts are usually sold as being vehicles to save tax, but nowadays, they’re not as effective for this purpose as Family Investment Companies.
Trusts are effective, however, to retain both a degree of flexibility and control when gifting assets.
But especially if you’re a High Net Worth Individual, FICs are preferred. Find out why.
Family Investment Companies
A Family Investment Company is a private limited company established by a family, which holds and manages family wealth and assets.
The company is owned and controlled by family members, allowing them to have more control over their assets and investments.
One of the key benefits of an FIC is that it can provide tax-efficient wealth transfer and succession planning for family members.
For example, a family with a large investment portfolio may decide to set up an FIC to hold and manage their assets.
By transferring their assets to the FIC, they can take advantage of the company’s structure, which can be more tax-efficient than holding assets as an individual.
FICs also provide flexibility in terms of distributing income and assets to family members, allowing for more efficient tax planning.
Another benefit of an FIC is asset protection.
By holding assets in a limited liability company, family members can shield assets from personal liabilities and potential legal claims.
A trust is a legal arrangement where assets are held by a trustee for the benefit of beneficiaries.
A trustee is responsible for managing the trust assets and distributing income and capital to the beneficiaries in accordance with the trust deed.
Trusts are commonly used for estate planning and succession planning, and similarly to FICs, can also offer asset protection.
For example, a family may set up a trust to hold their assets and manage their investments.
The trustee would be responsible for managing the assets and distributing income and capital to the beneficiaries in accordance with the trust deed.
By transferring their assets to the trust, the family can take advantage of tax-efficient wealth transfer and succession planning, as well as asset protection.
One of the key benefits of a trust is its flexibility.
Trusts can be tailored to meet the specific needs and objectives of the family, allowing for greater control over the management and distribution of assets.
Trusts can also provide confidentiality, as the details of the trust are not made public.
Family Investment Company vs Trust
In a nutshell, trusts are less tax-efficient than Family Investment Companies, as you’re subject to higher rates of income tax and capital gains tax, and you’re liable for inheritance tax.
A Family Investment Company can have the same benefits of a trust, plus the tax incentives.
The goals of Family Investment Companies are:
→ manage family investments
→ reduce your taxes, as they’re taxed as a corporation rather than a trust
How they work
|Trust||Family Investment Company|
|How it works||Holds assets||Essentially a private limited company|
|Used for||Income, capital growth, or loans||Family estate planning purposes|
|Set up by||The ‘settlor’||The company founder|
|Benefitted by||Beneficiaries||Shareholders who are usually family members|
|Documentation||Trust deed/letter of wishes||Articles of association|
|Tax-efficiency||Less tax efficient, particularly to gift assets in excess of a few hundreds of thousands||A common means of funding is the founder makes a loan and enjoys its repayment|
|Taxation||Pays income tax (38%-45% on dividend income)||Taxed in the same way as any investment company, profits are subject to corporation tax (19%-25%)|
As you can see, FICs and trusts are taxed differently in the UK.
FICs are taxed as a company, while trusts are taxed as a separate entity.
FICs are subject to corporation tax on their profits and gains, while trusts are subject to income tax and capital gains tax on their income and gains.
However, FICs and trusts both offer tax-efficient wealth transfer and succession planning.
FICs can distribute income and assets to family members in a tax-efficient manner, while trusts can offer tax advantages through the use of trusts for specific purposes, such as inheritance tax planning.
You want to share your money with your extended family in a way that saves on taxes.
Instead of giving the money to a trust, which could lead to immediate inheritance tax charges, you create a new company with different types of shares that several family members will own.
You give the company an interest-free loan, and it invests the money in a portfolio of residential properties.
Here are the things to think about when starting your Family Investment Company:
- Putting in assets
How much money will you put in?
What will your FIC invest in?
- Type of company
Will it be limited or unlimited?
- Different types of shares
How much control do you want each person to have?
FICs and trusts are both popular structures for managing family wealth and assets in the UK.
While both structures offer benefits and drawbacks, choosing between them requires careful consideration and it becomes imperative to speak to a Tax Expert.
FICs offer tax-efficient wealth transfer and succession planning, as well as asset protection and flexibility.
Trusts offer similar benefits, including tax advantages and flexibility, but can be more complex and costly to set up and manage.
When deciding between an FIC and a trust, it’s important to consider your specific needs and objectives.
For example, trusts have a particular advantage over FICs, in that you’re able to benefit people yet to be born.
With the help of a Tax Expert, it’s possible to create a blended, tailored solution combining the benefits of both.
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