Family Investment Companies Unwrapped
- AuthorJonathan Rathbone
A family investment company (FIC) is simply a term for a corporate vehicle which holds investment assets for the benefit of its shareholders who are normally members of the same family. There is no special status or registration required with Companies House or HMRC in respect of an FIC. You can therefore tailor how you structure or establish your FIC to your particular requirements.
It used to be more common to establish a trust to hold investment assets which you wanted to pass on for the benefit of the next generation. However, the tax rules were changed in 2006 which made trusts less attractive from an inheritance tax planning perspective. A trust is created where you separate the legal and beneficial ownership of an asset, so the parents, or a trusted third party, would be the legal owners, but the beneficial ownership of the assets would be held for the benefit of the parents' children absolutely or at the discretion of the trustees.
A company is a separate legal entity, so any investment assets are transferred to the FIC which owns the legal and the beneficial ownership of the investment asset. The key is then determining who owns the FIC and that depends on who owns the shares and what rights attach to those shares. It is possible for shares to have different rights to capital, income, and voting.
The FIC structure is best suited as a long-term vehicle to pass assets from one generation to the next, rather than in situations where the assets are likely to be sold and the capital returned to shareholders in the short term.
Control and Voting Rights
In order to replicate some of the properties of a trust, the parents can hold shares which carry 100% of the voting rights. This means that the parents are the only people who can appoint and remove directors or change the rules governing the company. The directors govern the day to day management of the company and so the parents with the voting shares have complete control of what investments the FIC buys or sells. They also have complete control of whether or not any income is distributed by way of dividend and, if so, what dividends are paid out on what shares.
Unless the shares in the company are sold, the only way the shareholders see any benefit from their investments is through dividends. It would be common to set up an FIC so that dividends could be paid at different rates on different classes of share. This means that the parents can decide who should receive what income and when.
The value of the share is mainly determined by the rights of a share to receive a proportion of the proceeds on a winding up of the company. You can create a share which only has a right to receive any proceeds in excess of a certain amount. So if the company had investment assets with a net asset value of £2 million you could create a share which will not receive any proceeds until the proceeds available for distribution were at least £2.2 million. That means that when those shares are issued, they are worth very little because if the company was wound up or sold at that time those shares would not receive anything. The shares only have a hope value that they will become worth something if the net assets of the company grow above £2.2 million. These are called "growth shares". Because growth shares are perceived to have little value, there should be few tax implications of issuing such growth shares to your children.
Putting assets into the FIC
If you gift assets into an FIC, then this is a potentially exempt transfer for inheritance tax purposes. There is therefore a risk that it will be taxed if the parents giving assets die within seven years of making the gift. It is more common to transfer investment assets into the FIC at market value, leaving the purchase price outstanding as a loan owing from the company. As a result, there is no gift and so no potential inheritance tax charge.
If you transfer a £1 million property into an FIC leaving the price as an outstanding loan, then the net asset value of the company is zero. This means that the shares in the company are also arguably worth zero and so you do not need to worry about creating growth shares.
When you transfer an asset into an FIC, you may incur capital gains tax on the disposal of that asset. You should therefore take tax advice on whether that capital gain could be rolled over into loan notes or redeemable preference shares. You would also want to consider whether there were any reliefs available for stamp duty land tax which may also be payable on the transfer of a property.
An advantage of transferring assets into an FIC in return for a loan, is that the parents making that transfer can then receive payments out of the FIC as a repayment of their loan, which would not be subject to any tax as it is a repayment rather than income or capital.
You can therefore set up an FIC so that the future growth in the value of the assets should be outside of the parents’ estates for IHT purposes and any income such as rent can be taken back by the parents as loan repayments without a further tax charge to them (but after the company has paid tax on that income). In a nutshell it’s a way of having your cake and eating it: giving away future growth in the value of capital assets but without losing the income that they produce.
Reservation of a benefit
When assets are put into a trust, the parents would no longer normally be able to benefit from income or capital in respect of those assets. Where assets are put into an FIC, the parents' shares may have some dividend entitlement and the parents technically may be able to issue themselves further shares with capital and income rights because they have control of the company. There is a risk that HMRC will challenge whether the parents have therefore gifted 100% of the growth of the FIC to the children unless all such rights are revoked.
HMRC did set up a unit to investigate the use of FIC's in 2019. However, the unit was absorbed into a wider department handling tax compliance in August 2021 and HMRC concluded that there was no evidence to suggest that those using FICs were more inclined towards tax avoidance.
That does not mean that the Government and/or HMRC will not introduce new legislation or guidance in respect of the use of FICs and so it is important that you continue to take advice to monitor any changes to ensure that an FIC continues to meet your tax planning objectives.
If you would like any further advice in relation to the legal structures of family investment companies, then please contact Jon Rathbone in our Corporate and Commercial Team. If you would like any further advice in relation to inheritance tax and estate planning, then please contact Caroline Farmer in our Private Client Team.
The tax implications of setting up trusts or family investment companies are complex and depend on each set of individual circumstances. It is therefore a that you always seek detailed tax advice before deciding on which structure would work best for you.
The information contained on this page has been prepared for the purpose of this blog/article only. The content should not be regarded at any time as a substitute for taking legal advice.