What are family investment companies and why are they an alternative to trusts?

A Family Investment Company can be very beneficial for inheritance tax planning, asset protection and wealth accumulation. Nicola Brant, a Partner in our Tax Planning team, gives an outline of the Family Investment Company and its uses.

A Family Investment Company (FIC) is a bespoke private company, which can be used as a tax-efficient alternative to family trusts. A FIC is a flexible structure, allowing families to define how specific family members benefit through varying rights attaching to shares, or the number of shares in issue. The directors and shareholders of the FIC are normally family members. As with trusts, the structure of the FIC can enable parents/grandparents to retain control over assets, whilst accumulating wealth in a tax-efficient environment and facilitating future succession planning. It is preferable to set up FICs with cash (by gift and/or loan), as the transfer of property or shares is likely to involve capital gains tax and stamp duty.

How can Family Investment Companies help manage exposure to Inheritance Tax?

A FIC can help families manage their exposure to Inheritance Tax (IHT) in several ways. The key features and benefits of a FIC are as follows:

• When the FIC is formed, shares can be given to family members without incurring any immediate tax charges and, after seven years, the full value of what has been given away will pass out of the estate of the founders, so avoiding any IHT
• If founders lend initial capital to the FIC, any growth in the value of investments held by the FIC will be outside the founders’ estates
• The founders can retain distinct classes of shares, so enabling them to retain income (and capital if the company is ever wound up)
• If shareholders have a minority interest in the FIC, the value of their shareholding will be discounted on death for IHT purposes, taking into account the size of their holding and their inability to sell the shares or demand income from the company
• Unlike trusts, the FIC will not pay periodic charges to IHT which apply to trusts at up to 6% every ten years or exit charges if and when capital is distributed
• A FIC may provide useful protection in the event of a shareholder’s divorce. The FIC can be structured so that shares can only be held by direct family members (excluding spouses).