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A family investment company (FIC) is a private limited company that is established to manage and hold family wealth.
It’s normal for individuals to seek to build wealth during their lifetime with a view to providing for themselves and ultimately those they leave behind. The difficulty with this is when there is a desire to pay as little inheritance tax as legally possible and you can identify surplus in your estate.
Retaining assets in excess of your future needs is not good estate planning if you have an estate that’s liable to inheritance tax; it will result in paying tax on those assets at 40%.
It’s important to consider gifting at this stage but that is not without its complications. Firstly, gifts are considered disposals for capital gains tax and so for assets that have been held for a long time, a gift can be a costly process and can end up being prohibitive. You also have to be mindful that the value of a gifted asset generally takes seven years to fall out of your inheritance tax calculations and this may not be realistic if it has taken you a long time to acknowledge the assets as being surplus.
A Family Investment Company (FIC) is a private limited company that is established to manage and hold family wealth. It’s an arrangement that enables families to hold the value of a range of assets through a company structure (shareholding). Shares in the FIC can vary in nature from person to person allowing them to be tailored to each individual’s needs, for example certain shares can have voting rights while others don’t, some can produce dividends whilst others are restricted to capital and some can have all three. Shares can be issued and distributed without needing to alter the underlying assets. They can be issued to individuals or to trusts if there is a desire to keep wealth outside of an individual’s estate. It allows families to pool their assets and invest them collectively, with the goal of preserving wealth and passing it down to future generations.
The FIC is owned by family members who become shareholders in the company. The most suitable family members tend to be directors who will manage the assets on a day to day basis. The FIC can invest in a variety of assets including property, shares and other investments.
A FIC provides a tax-efficient way for families to manage their wealth over a long period of time. The FIC is subject to corporation tax on its profits, which is currently at a lower rate than income tax. The shareholders of the FIC can receive dividends from the company, which are subject to dividend tax rates, also lower than income tax rates.
The issuing of new shares and being able to choose the benefits or rights which are to be attached to each share can make the gifting process a lot easier. For example, if a parent was looking to make a gift to their adult child but they had concerns as to how the asset would be subsequently managed, they would have the ability through a FIC to issue to the child shares without voting rights. As the director, the parent would retain control of the asset on a day to day basis. In this manner, the FIC has similar benefits to a discretionary trust but without the restriction over the value that can enter the arrangement free of tax.
Another benefit of a FIC is that it can provide a structure for family members to work together to manage their wealth, providing a platform for family members to collaborate on investment decisions and to share knowledge and expertise.
FICs are typically suited to individuals who are likely to have taxable estates. They are particularly efficient arrangements for those looking to build a property portfolio.
Setting up a FIC is complex; the structure must be set up correctly and the company’s activities must be managed in compliance with relevant laws and regulations, so it’s essential to get specialist legal advice. Please get in touch with our team of expert Wealth Protection lawyers by telephoning 03333 058375 or email WealthProtection@psg-law.co.uk
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