Families often want to pass on wealth to subsequent generations as tax efficiently as possible. Significant wealth can arise following, for example, the disposal of a business, and families find themselves with a significant amount of cash which will need to be managed, distributed and controlled.
One method is the use of a Family Investment Company (FIC), which has become more popular in light of the significant changes in 2006 concerning the taxation of trusts. These changes had the effect of ensuring that all lifetime transfers of assets (including cash) into trusts (with a few exceptions) are subject to a lifetime inheritance tax (IHT) charge of 20% on any value in excess of the transferor’s available nil-rate band (which has been £325,000 since 2009). Consequently, as the popularity of trusts has declined, FICs have become more popular as a vehicle through which wealth can be invested and passed onto future generations.
Family investment companies are merely private companies, incorporated under the Companies Act 2006, which are created for the purposes of holding investments for a family. The process of incorporating a FIC is relatively painless, and it will be registered at Companies House, as for any private company.
A FIC is normally created with limited liability due to the advantages this can present for shareholders. However, it is possible for a FIC to be established with unlimited liability. The advantages of this are largely to do with increased privacy for shareholders since unlimited companies are not required to file annual accounts at Companies House, so the financial position of the company is not available viewing for third parties.
A family investment company is usually incorporated with subscriber shares issued at nominal value to the relevant family members and the shares can be issued with different voting and income rights (e.g. a particular class of shares can be non-voting but entitled to an income at the discretion of the directors – typically these are allocated to younger members/children/grandchildren of the founders).
Following the incorporation of the FIC, the next step is to fund the FIC by either:
- gifting the assets which can be made up of cash, property or investments. If property or shares are transferred to the FIC, stamp duty land tax or land transaction tax (property) or stamp duty (shares) may be payable and the value of the asset transferred will be attributable to Inheritance tax (“IHT”) and not after the asset appreciates in value i.e. any increase in value of the asset will not form part of the estate for IHT purposes; or
- if the asset consists of only cash, it can be loaned to the family investment company. A loan allows the founders to extract cash from the company through repayment of the loan rather than through a dividend. The repayment of the loan will not be subject to any tax and can provide the loan holder with an income.
Eventually the loan can be transferred to other family members and if the donor survives seven years from the gift of the loan, no IHT will be payable.
Once the cash/non-cash asset has been transferred (by way of loan/gift) to the FIC, the investments are managed by the directors to generate income and/or capital growth. In this way, the older generation can control the FIC, but also control the level of income paid by the FIC to various family members as shareholders.
Trusts can also hold shares in the family investment company and are often used to allow the transfer of wealth to third or fourth generations of family members.
If you have any questions relating to family investment companies and would like some advice please contact a member of the Corporate team.