Family Investment Companies - A Summary

Family Investment Companies (FICs) have risen in popularity in the UK over the last 15 years as an alternative to trusts as long term family wealth-holding vehicles. The need for an alternative arose as a result of changes in 2006 to the way trusts were taxed to UK inheritance tax (IHT), which made them significantly less tax efficient in comparison to personally-held assets.

Many families, whether ultra-wealthy or comfortably off, are reluctant for their children to potentially inherit significant sums of money at the relatively tender age of 18.  This concern means that a vehicle that enables families to pass assets to their children in a tax efficient way, while retaining control of the funds either indefinitely or until the children are mature enough to manage their wealth themselves is attractive.

What is a FIC?

A FIC is a private company, the shareholders of which are usually, but not always, individual family members or, where appropriate, may be trustees of a family trust.

The governing articles and other provisions of a FIC, its shareholdings and method of funding may be varied to suit the individual requirements of a family, in order to achieve their specific wealth succession and protection requirements.  

How is a FIC funded?

A FIC is usually created with a nominal amount of ordinary share capital held by one or more members of a family, or by trustees of a family trust.

Funding may be achieved in three ways, as follows:

1. An interest free (or interest-bearing, if desirable) loan to the company 
2. Subscription for redeemable preference shares
3. Direct subscription for ordinary shares

Loan

• The value of the loan continues to be an asset of the founder's estate, but most income and capital growth is attributed to the shareholders.
• As the loan is repayable on demand, depending on its terms, it may be withdrawn more flexibly than share capital.  Accordingly, this method of funding is most appropriate where the founder requires the ability to draw down on its capital.
• Loans may be assigned to members of the younger generation immediately or in the future, giving them greater control over how and when they should be repaid.

Redeemable preference shares

• Preference shares may carry a right to income at a fixed or variable rate, where this is desirable.  
• Control over how, when and the extent to which preference share capital may be redeemed may be given to the voting shareholders, directors or both.
• Useful where the whole or part of the initial foundation capital is to be given to the younger generation at a future point, this method enables control to be retained by the founder as to the terms of capital redemption.

Combination 

• Appropriate where the founder wishes to retain part of the capital contribution in the form of a loan but transfer part of the capital to members of the younger generation in the future.

Direct subscription for shares

• Useful where the flexibility of funding via loan or preference shares is not required.

How is a FIC structured in terms of its shareholdings?

• In addition to any preference shares issued as part of funding the FIC, ordinary share capital will be issued for subscription.
• Different share classes may be established, often known as "alphabet shares" (A shares, B shares etc.). This allows flexibility so that dividends may be declared to shareholders within specific classes, when required, rather than the company having to declare a dividend payable to all shareholders.
• Voting rights may also be weighted in favour of certain classes of shares. For example, the founder's shares may carry extra voting rights to enable them to retain control of the company.
• If the founder holds shares with voting rights, a proportion of the value would be attributable to these voting rights and, as such, to the founder. However, as a minority voting right, this would be discounted accordingly.
• Additional considerations where there are trustee shareholders include:
  • If shares issued to a trustee shareholder carry economic rights, any income and capital growth will accrue to the shares in the trust. This enables the growth to be kept outside the founder's estate.
  • If the founder is not also a trustee of the trust, at least 26% of the voting rights could be retained outside the trust to ensure that the founder's vote is required for a special resolution (which requires 75% of the vote to pass).

How and when are FICs taxed?

Specific tax advice should always be taken when establishing a FIC. Broadly, however the potential tax implications would include the following:

• Corporation tax will be payable within the FIC when investments are sold and gains realised but not on dividend income;
• Income tax will be payable by shareholders in respect of dividends received from the FIC.

Advice with regard to any potential capital gains tax or IHT consequences will also be required, and it should be borne in mind that the tax position will be more complex in the case of trustee shareholders.

Advantages of a FIC include:

In addition to a number of tax advantages, other benefits include the ability for the founder or other family members to retain control over family wealth through voting rights and directorship while enabling children to learn about company administration, financial decisions and managing their wealth gradually in a controlled environment.

Disadvantages of a FIC include: 

One of the disadvantages relates to the increased level of transparency and exposure (for example, in the case of divorce or bankruptcy) inherent in a corporate structure rather than a trust structure.  Potentially, directors are also more at risk than trustees of being attacked in relation to their decisions.