Family Investment Companies (FICs) have been used as part of succession planning since changes to trust taxation were brought in by the Finance Act 2006. Their use is likely to rise due to the Inheritance Tax net widening as a result of the latest budget, particularly from April 2027 when pension pots will be included in estates for Inheritance Tax purposes.
What is a Family Investment Company (FIC)?
An FIC is simply a company that has been established with the specific purpose of meeting the needs of a single family. It is generally created to hold investments for the family.
The investments within the company would typically include equities and/or property.
How can a FIC be used in Estate Planning?
Estate planning is not just about saving Inheritance Tax. Although this is a key objective, it is also about maintaining and protecting family wealth.
A company is a structure that enables ownership to be separated. Ownership is with the Shareholders but the day-to-day management and control of the business is with the Directors. Using a company enables a family to pass wealth down through generations without giving up control of how the wealth is managed.
Capital is also not easily extracted, which helps ensure it is preserved for future generations. The constitution of a FIC can also help protect against the impact of divorce by encouraging the use of marital agreements and by controlling the ownership of shares.
Inheritance Tax Saving – 3 Key Benefits:-
- The reduction of the estate of the founders of the FIC. They will make a gift on the formation of the company, by either passing shares or cash for the subscription of shares to children/grandchildren. Sometimes cash is also gifted to a family trust, which will then subscribe for shares. These initial gifts save Inheritance Tax completely if the donor then survives 7 years;
- To the extent shares are held by family members and not the founders, the profits generated by the FIC will be outside the founders’ estate, saving further Inheritance Tax;
- A FIC is not within the relevant property regime so is not subject to 10 year anniversary charges of 6% like a discretionary trust would be, or subject to exit charges.
Discretionary Trust vs FICs
| Discretionary Trust | FIC | |
| Control | The trustees manage and control a discretionary trust and must do so for the benefit of their beneficiaries | Directors control a FIC on a day to day basis and have similar fiduciary duties to trustees, acting in the best interests of the company and its shareholders |
| Who Can Benefit | A key advantage of a discretionary trust is that anyone within the class of beneficiaries can benefit. A trust can also have a power to add new beneficiaries | Only shareholders can benefit from dividends and capital growth. A company can also employ anyone. |
| Funding | A trust can be funded up to an individual’s available nil rate band (£325,000) but may be otherwise taxed at a lifetime Inheritance Tax rate of 20% | Shares can be subscribed for in cash up to any value without tax charges. If a FIC is established, shares should be subscribed for at their market rate to avoid tax charges |
| Tax on Income | Trusts pay income tax at 45% or 39.5% on dividend income | FICs pay corporation tax at 25% or 0% on dividend income |
| Tax on Gains | Trusts pay capital gains tax at 24%. Annual exemption is £3,000 | FICs have no annual exemption and pay corporation tax on capital gains at 25% |
| Distributions of Income | A beneficiary receives income with a tax credit at 45% which can be reclaimed if the beneficiary is a lower rate tax payer | Income is paid in the form of dividends from post-tax profits and taxed at the individual’s appropriate dividend rate. An annual exemption of £500 is available |
| Distributions of Capital | Capital distributed from a relevant property trust may trigger an exit charge but is not taxable on the beneficiary | Capital is not easily distributed to shareholders. Any profit element will give rise to either an income tax charge or a capital gains tax charge |
| Inheritance Tax | A trust will pay tax on every 10 year anniversary at a rate of 6% on the market value of all assets above the nil rate band | A FIC does not pay inheritance tax but a shareholder will pay inheritance tax on the value of shares within their estate – this value may be discounted to reflect a minority interest |
| Privacy | Whilst all trusts now have to be registered with HMRC, the register is not a public document | Companies have to be registered at Companies House and details of shareholders will be available. Company’s articles of association are public |
Trusts have always been a traditional feature of estate planning, however as many of the tax advantages will survive the recent tax changes, FICs are becoming increasingly popular as an alternative to trusts.
In some ways trusts and FICs are similar. For example, they are both essentially set up for the management of assets for the benefit of the underlying beneficiaries and to preserve the family wealth.
Trusts still certainly have a place in estate planning, and have perhaps always been the default position when wanting to gift assets whilst also retaining an element of control. For the higher net valued individuals who wish to gift significant values and where perhaps flexibility and family involvement are priorities as well as investment growth, a FIC may be the better option. A combination of the two can also provide for an effective structure. For example, the addition of a discretionary family trust within the FIC structure could offer more protection of capital assets, particularly in the event of divorce.
Ultimately, as with any structure there are pitfalls, nuances and anti-avoidance rules to consider. Setting up a FIC is not a one size fits all exercise. It is a bespoke structure and multi-disciplinary advice should be sought to ensure it is appropriate to meet your family’s needs.
Here at Wellers we can help. Please contact us on 020 7481 2422 or email enquiries@wellerslawgroup.com
