Family investment companies: essential facts about FICs
Family investment companies (FICs) enable many families – with the support of tax advisers, lawyers and financial advisers –to pass wealth to the next generation while taking advantage of some of the protections a corporate structure provides.
However, FICs come with a wide range of complexities.
These complexities need to be fully understood by anyone considering or recommending a FIC within the family’s broader estate and succession planning.
If a FIC is set up incorrectly, there may be unintended tax consequences.
How to approach the use of a FIC
FICs are not a cure-all for inheritance tax (IHT) planning. They should always be considered as one tool in a toolkit, which can be used to assist with longer-term estate planning.
Any family considering a FIC should also consult with their financial adviser to consider different wealth planning structures, such as trusts and offshore bonds. You may jointly conclude that a FIC isn’t the right solution.
When a FIC may be used
A FIC in its simplest form is a corporate entity with an innovative shareholding structure. True to the name, it is an investment company, and there are usually provisions within the articles of the company to only allow the shares to pass between family members.
Each family’s circumstances are different. As a result, the complexity of the shareholding arrangements – including the rights attributable to the shares, and who the holders of the shares are – differs between each FIC.
Based on our experience of advising on FICs, there are usually two distinct family scenarios:
1. Parents have generated wealth in their own names
- They hold this in cash and personal investment accounts
- They are looking to pass future growth in value to their children and ensure it doesn’t arise in their estate
- The parents have liquid assets which can be used to fund a new FIC vehicle
2. Parents hold 100% of the shares in a successful business
- This is either a trading business or an investment business (usually within property)
- The parents are looking to transfer as much of the future growth in the shares to the next generation
- Unlike scenario 1, there is already a company with value
Each scenario requires a different form of FIC share structuring and different levels of valuation advice to ensure that there is no transfer of value deemed by HMRC.
How FIC profits are taxed
Generally, a FIC is a corporate entity which, if subject to tax in the UK, will be liable for UK corporation tax (CT) on its profits, which is currently set at a rate of 25%.
The calculation of the profits does, however, depend on which accounting standards are used (see Accounting for FICs below for more on this).
There are, however, two important CT reliefs available to UK companies which a FIC can take advantage of:
Dividend exemption
- Dividends received may not be subject to CT if the conditions are met
- Where dividends are received from non-UK companies or from investment funds, the rules can be complex, so tax advice is essential before claiming this exemption
Substantial shareholding exemption (SSE)
- The SSE exempts any gain made on a share disposal from CT where the conditions are met
- At a high level, the SSE conditions are met where the FIC holds more than 10% of the shares in a trading company, for a period of at least 12 months
- There are complexities to the SSE rules, so advice should be taken before SSE is claimed on a gain
How profits are taken from the FIC
There are different ways for profits to be taken from the FIC, broadly being salary, dividend or loan repayments.
In all instances of profit extraction, we recommend taking professional advice. This will ensure that the extraction methodology is properly thought through, is as tax efficient as possible with no unintended tax consequences arising.
Dividends
- Where a shareholder’s share rights enable them to receive dividends, any dividends declared to the shareholder by the board of directors will be subject to income tax on those dividends
- The rate of tax levied on the dividends is currently between 10.75% and 39.35%, with the actual tax rate depending on the shareholder’s other income
Salary
- Where family members are providing services to the company, they can take salary as remuneration for those employment activities performed
- Salary is subject to PAYE, with income tax and national insurance collected
- Gross salary payments and national insurance contributions (NICs) will be an allowable expense for CT purposes so long as they are “wholly and exclusively” incurred for the purpose of the business
Loan repayments
Where an individual has lent funds to the FIC, the FIC can generally repay the loans to the individual without any tax implications arising.
If interest is applied to the loan, then the FIC will need to apply a withholding tax to any interest payments at a rate of 20%.
How FIC accounts are prepared
Where a UK limited company is used as the FIC, its accounts will typically be prepared under one of two accounting (UK GAAP) frameworks: FRS 105 for micro-entities, or FRS 102 Section 1A for small entities. The applicable standard depends on the size of the company, including factors such as turnover, gross assets and employee numbers.Under FRS 105, investments are generally carried at cost and not revalued annually.
FRS 102 Section 1A may require certain investments to be measured at fair value, with annual revaluations reflected in the accounts. As a result, accounts prepared under FRS 102 Section 1A are typically more complex and require additional work each year.
This difference has an impact on tax:
- Under FRS 102 Section 1A, investments that fall within the loan relationships regime (such as certain bond funds) may be revalued annually. Any increase in value may give rise to a taxable credit for corporation tax purposes, even though no cash has been realised from the investment. This can create a timing mismatch between the tax liability and the receipt of funds.
- Under FRS 105, where investments are generally held at cost, this issue does not arise.
Professional advisers can guide you through the right accounting treatment for your FIC, and the tax implications.
How BKL can help
While FICs can assist in the transfer of wealth between generations, there is no one-size-fits-all with a FIC structure.
Tax and financial advice should always be taken before they are set up to ensure they are the correct vehicle for the family to undertake their investments through.
Working directly with families, or with IFAs acting for families, we’re experienced at helping clients to explore and set up FICs.
Our tax and business advisory specialists build an understanding of the family’s specific circumstances and advise on the most tax-efficient ways to manage and pass on your wealth.
For a conversation about how we can help you, get in touch with us using the form below.
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Frequently asked questions: Family investment companies (FICs)
What are the main advantages of a family investment company?
A family investment company (FIC) can help families manage investments, pass wealth between generations and retain control over assets while planning for inheritance tax (IHT). A well-structured FIC can allow future growth in value to accrue outside the original wealth holder’s estate, while providing flexibility over voting rights, income distribution and succession planning. Many families also value the governance, control, and long-term wealth preservation benefits a company structure can provide.
Who is most likely to benefit from a family investment company?
FICs are typically most suitable for families with significant investable wealth; successful business owners; entrepreneurs who have sold a business; and individuals seeking long-term succession planning. They are often considered where there is a desire to preserve family wealth across generations while maintaining influence over investment decisions.
Whether a FIC is appropriate depends on the family’s objectives, tax position, investment strategy and future income requirements.
Can a family investment company replace a trust?
No. A FIC and a trust are different structures that can serve different purposes and are often used together rather than as alternatives.
A FIC can provide control and flexibility through share ownership; trusts can offer additional succession planning benefits, asset protection and flexibility for future beneficiaries.
Many family wealth structures combine both vehicles to achieve specific objectives for tax, governance and family.
What happens if assets are transferred into a family investment company?
Transferring assets into a FIC can trigger tax consequences depending on the type of asset involved. For example, contributing property, investment portfolios or shares may result in capital gains tax, stamp taxes, or other tax charges. The tax treatment depends on the circumstances and the assets being transferred.
Seeking advice before any transfer is important because some tax consequences cannot easily be reversed once the transaction has taken place.
Does a family investment company eliminate inheritance tax?
No. A common misconception is that simply creating a FIC removes inheritance tax exposure. In reality, a FIC is often used to freeze the value of existing wealth and allow future growth to accrue to younger generations. Additional planning, such as gifting strategies and wider estate planning, may still be needed to reduce the overall IHT exposure of a family over time.
How much does it cost to establish and run a family investment company?
The cost depends on the complexity of the structure, the investments held and the level of ongoing administration required. Families should consider legal, tax, accounting, company secretarial and investment advisory costs. Ongoing expenses may include annual accounts preparation, corporation tax compliance, Companies House obligations, and governance procedures. The benefits of a FIC are generally easier to justify where substantial assets are involved and long-term planning objectives exist.
Are family investment companies private?
Privacy is something a number of clients are outlining as one of their key requirements. Given that UK limited companies require their accounts to be filed at Companies House annually, we see many families choose a UK unlimited company as their FIC entity. An unlimited company has downsides, the main one being that the shareholders have unlimited liability. However, by investing in selected asset classes this liability risk can be minimised. The key benefit for using an unlimited company is that the accounts do not need to be filed with Companies House, giving families the privacy which they are looking for.
Can a family investment company hold property investments?
Yes. A FIC can be used to hold investment properties, although the tax and commercial implications should be carefully reviewed. Rental profits are generally subject to corporation tax within the company, but there may be tax costs when funds are extracted by shareholders. Property transactions can also give rise to stamp taxes and other charges.
The suitability of a FIC for property investment depends on the family’s wider investment and succession planning goals.
When should a business owner consider converting a company into a family investment company structure?
Business owners often explore FIC planning when a trading business has mature value, following a business sale, or as part of a long-term succession strategy. In some cases, existing company shares can be reorganised into frozen shares and growth shares to support future wealth transfer objectives. However, share reorganisations can be technically complex and should be reviewed alongside inheritance tax, capital gains tax and commercial considerations.
What should families consider before setting up a family investment company?
Families should consider their long-term wealth objectives, investment strategy, inheritance tax exposure, governance requirements and future income needs before establishing a FIC. It is also important to assess whether a company structure is the most suitable investment wrapper compared with alternatives such as trusts, pensions, personal investment structures or other estate planning arrangements. Independent financial advice and specialist tax advice should form part of any decision-making process.
Can a family investment company be used for family succession planning?
Yes. One of the primary attractions of a FIC is its ability to support structured succession planning. Different classes of shares can allow older generations to retain control while younger family members participate in future growth. This can help families create a framework for wealth transfer that aligns with their long-term objectives, while providing clarity around ownership, decision-making and the stewardship of family assets.
How do HMRC view family investment companies?
FICs are legitimate planning vehicles and are widely used in the UK for wealth preservation and succession planning. HMRC do not prohibit the use of FICs, but do expect structures to be implemented and operated correctly. Tax consequences depend on the legal arrangements, funding methods, share structure and ongoing transactions within the company.
Families should ensure that any planning has genuine commercial and succession objectives and is supported by appropriate professional advice.
