- Family Investment Companies: To FIC or not to FIC
Family Investment Companies: To FIC or not to FIC
Family Investment Companies: To FIC or not to FIC24th June 2022 - Published by
What is a FIC?
In their most basic form, FICs are a company, limited or unlimited, the shareholders of which are typically members of a family. The structure is used to separate control and benefit and allows families to protect and grow family wealth in a tax efficient manner
How is a FIC funded?
Typically, a FIC may be established following a sale of a family business. Cash generated from such a sale is placed into a company tax free. The transfer of the cash can be done outright or by way of a loan to the company . Creating a loan account offers a further planning opportunity in that the repayment of the loan creates a tax-free income stream. Also, any outstanding loan can be gifted to an adult child or a trust, the value of which will then fall outside of one’s estate after a period of seven years.
Other assets may also be transferred to a FIC; however the capital gains tax implications and stamp duty land tax will need to be carefully considered. This does not make the transfer of other assets into a company less attractive as the overall benefits which a FIC may offer usually exceeds the tax which may be triggered at the outset, especially if long term planning is envisaged.
Shareholders of a FIC
In exchange for the cash transfer or loan the parents will subscribe to shares in the company together with shares for their children and grandchildren. Each of them will have their own class of shares so as to ensure the rights of each share is tailored according to the needs of the individuals. A trust may also be allocated a class of shares for the benefit of the children especially if further flexibility is sought where the children may be under the age of 18.
The parent shares would often have the majority of the voting rights attached to them which provides the control element so often pursued when succession planning is considered.
It is normal to have bloodline provisions within the articles of association of the company which ensure shares cannot be owned outside the family, thereby ensuring the family wealth remains strictly within the bloodline on the breakdown of a relationship. The articles can be bespoke and tailored to suit each family depending on their circumstances.
Why a FIC?
Dividends paid into a FIC are received tax free. All other profits generated within a company are subject to corporation tax currently at 19% but this is set to increase to 25% in April 2023. These comparatively lower rates of corporation tax offer a substantial saving where a client’s income is otherwise taxed at the higher rate of 40% or additional rate of 45% or in comparison to a trust where the rate of tax is 45% Put simply if a long-term steady income stream is required then a FIC offers one of the best modes of planning.
It has been mooted that the increase rate of corporation tax takes away the appeal of a FIC but in reality, there is no denying that the rates of corporation tax are still lower than the income tax rates of a higher rate tax payer and that of a trust.
FICS are ideal if the planning sought has a long-term objective. FICS offer control, opportunity to accumulate wealth and an income stream and can be adapted to suit the individuals’ needs. However, the set-up costs and company compliance need to be considered in proportion to the value of the proposed investment.
Every family is different. If should you wish to explore whether a FIC would work for your family then please contact a member of our estate planning team to arrange a no obligation initial consultation.