Strategic Family Solutions
Navigating Wealth Transfer with Expertise and Insight
Family Investment Companies (FICs) have become increasingly popular as tax-efficient vehicles for preserving and transferring wealth across generations. They offer a flexible alternative to traditional trusts, allowing families to maintain control over assets while planning for succession. However, recent legislative changes necessitate a reassessment of their benefits and structures.
Understanding Family Investment Companies
An FIC is a private company established to hold and manage family wealth. Typically, parents (or founders) set up the company and hold voting shares, granting them control over investment decisions, while children or other beneficiaries hold non-voting shares, entitling them to dividends and capital growth. This structure allows parents to retain control over assets during their lifetime while facilitating the tax-efficient transfer of wealth to the next generation.
Key Features and Benefits
Control and Flexibility: Founders maintain decision-making authority over investments and distributions, ensuring that assets are managed in line with family objectives.
Tax Efficiency: FICs are subject to corporation tax on income and gains, which may be lower than personal income tax rates. Additionally, certain dividends received by the FIC may be exempt from tax, enhancing tax efficiency.
Succession Planning: By allocating non-voting shares to children or trusts, families can facilitate the gradual transfer of wealth, potentially reducing exposure to inheritance tax (IHT).
Recent Legislative Changes Impacting FICs
The UK government has introduced reforms affecting the taxation of family businesses and investment structures:
Inheritance Tax Relief Cap: Effective from 6 April 2026, Business Property Relief (BPR) and Agricultural Property Relief (APR) will be capped at £1 million of combined value in an estate. Assets exceeding this threshold will qualify for only 50% relief, effectively imposing a 20% tax on the excess value. This change impacts the attractiveness of FICs for IHT planning, especially for estates with significant business or agricultural assets.
Corporation Tax Rate Increase: As of April 2023, the corporation tax rate increased, affecting FICs classified as close investment holding companies, which are subject to the main rate without eligibility for marginal relief. This change may reduce the tax efficiency of accumulating income and gains within an FIC.
Establishing and Managing an FIC
Setting up an FIC involves incorporating a company limited by shares, drafting tailored articles of association, and possibly a shareholders' agreement to define rights and responsibilities. Key considerations include:
Funding: Founders often capitalise the FIC through loans or share subscriptions. Loan repayments can be made tax-free, providing a mechanism for founders to extract funds without additional tax liabilities.
Governance: Appointing directors (typically the founders) to manage the company's affairs, with provisions to add independent directors if desired.
Compliance: Ensuring adherence to statutory obligations, such as filing requirements and maintaining accurate records.
Legal and Tax Considerations
While FICs offer several advantages, it's crucial to consider potential drawbacks:
Double Taxation: Profits are taxed at the corporate level, and subsequent distributions (dividends) to shareholders are subject to personal income tax, potentially leading to higher overall tax liabilities.
Complexity: The establishment and ongoing management of an FIC require careful planning and professional advice to navigate legal and tax complexities.
Legislative Risk: Future changes in tax law could affect the benefits associated with FICs, necessitating regular reviews of the structure's effectiveness.
Conclusion:
Family Investment Companies remain a viable tool for wealth management and succession planning, offering control and potential tax efficiencies. However, recent legislative changes, particularly concerning UK inheritance tax reliefs and corporation tax rates, necessitate a thorough evaluation of their suitability. Engaging with Horizon’s experienced legal and tax advisors is essential to tailor an FIC structure that aligns with your family's objectives and complies with the evolving regulatory landscape.