A Family Investment Company (FIC) is a potentially tax efficient vehicle used for estate and Inheritance Tax planning. A FIC is often an alternative to Trusts since they enable significant wealth to be passed onto future generations while protecting and retaining control over the assets gifted.
Key points include:
- Dividend income received by a FIC is not subject to tax
- Other income and gains taxed at 20%
- On incorporation shares may be gifted free of any immediate tax
- The board of directors controls the FIC. Consequently it is not necessary to maintain a majority shareholding to maintain control
- A FIC is an onshore structure that is not subject to Financial Conduct Authority Regulation
- Different shareholders can receive different levels of income at different times
Key Inheritance Tax advantages
When a FIC is created shares can be given to family members without incurring any immediate tax charges and after seven years the value of the shares gifted will fall out of the estate of the founders for Inheritance Tax, avoiding any Inheritance Tax.
Where shareholders keep a minority interest in a FIC the value of their shareholding will be discounted on death for Inheritance Tax, taking into account the size of their holding and their inability to sell the shares or demand income from the company. These discounts can be substantial and significantly reduce the Inheritance Tax due.
A FIC is a very tax efficient vehicle for accumulating wealth compared to a Trust. Income and Capital Gains are subject to a maximum Corporation Tax rate of 20% which, compared to Trusts, represents a saving of 25% for income and 8% for Capital Gains. The lower the rates of tax means the FIC is able to reinvest more of its income, generating greater growth.
Profits are extracted by dividend payments which are very tax efficient. The payment of any additional taxation for higher rate tax payers means that additional tax only arises when profits are distributed, which is at the discretion of the board of directors. Given the advantages of rolling up the income at the lower rates of income is only normally distributed when needed.
As with all companies control of a FIC is with the board of directors. The board decides what investments the company makes and if and when dividends are paid to shareholders.
However, compared to an ordinary trading company a FIC often goes much further to ensure that the board has overall control of the structure and management of the company. For example, shareholders may not be able to dismiss a shareholder, or transfer shares, without first seeking board approval.
FICs may provide protection in the event of a family divorce, not least of which because shares often cannot be held by non-family members (including ex-spouses). The value of shares held by a divorcing shareholder will be taken into account as an asset, but their value is always negotiable.