The Revival of the Family Investment Companies

With the new Labour chancellor announcing that her first budget will be delivered on Wednesday 30 October 2024, and against a backdrop of significant public sector expenditure demands, there has been much discussion as to which parts of society and the economy will be targeted to help raise additional taxes beyond those signalled during the election campaign.

Many individuals with cash or asset rich portfolios have therefore been considering the best structures available to them over the past few months, which has led to the team at Michelmores receiving a significant number of enquiries from individuals and referrers in relation to the establishment of family investment companies (FICs).

Whilst some individuals advocate a “wait and see” approach amid the uncertainty of what the first Labour budget will deliver, the clarity offered by a FIC structure is appealing, together with the fact the HMRC has recently scrutinised FICs and not found them wanting. It is no wonder therefore that FICs are attracting attention. This article considers what a FIC is, the common features of a FIC structure and why such structures are seen as being an advantageous approach in tax and family wealth planning.

What is a FIC?

A FIC is a UK corporate entity, established in order to hold investments and/or wealth for the benefit of family members, usually to the benefit of the younger generations. The term FIC is not a specific legal term with any special treatment from a legal or tax perspective, but if established correctly, can offer a tax efficient structure for wealth and assets to be transferred onto future generations.

How is a FIC set up?

Whilst each individual FIC is established with the specific aims and objectives of the client taken into account, notably from a tax planning perspective (which we would always advise clients to consider before proceeding with the establishment of a FIC), common features of a FIC are:

• the FIC is incorporated as a corporate entity in England & Wales, though an existing entity could also be turned into a FIC to achieve the same goals with some pre-planning. Many FICs are incorporated as unlimited companies, thereby obtaining the advantage of an exemption to file accounts at Companies House meaning the finances of the structure remain private;
• FICs will be incorporated with a niche set of articles of association, which will contain a class of share that retains all voting rights, usually retained by the founder of the FIC. At least one other class of share is created to hold the economic rights to income (by way of dividends) from the FIC or to receive capital upon a return of capital (such as winding-up) with these additional classes of share having no voting or control rights over the FIC;
• common control of the FIC on day-to-day basis will be by its directors, appointed by the voting shareholders. It is common that the initial directors will include the founder of the FIC and at least one other appropriate person(s) the founder decides; and
• in order to fund the FIC and its future investments, it is common for the founders to transfer cash to the FIC, either as a share subscription or as a loan. It is also possible for the founder to transfer assets, in return for a loan being granted to the transferor by the FIC to the value of the asset transferred to the FIC. There are tax consequences to the transfer of assets and this must be considered before embarking on a FIC strategy. Depending on the maturity of the asset, the cost may be limiting.

What are the tax considerations?

Corporation Tax

As a corporate entity, the FIC will pay corporation tax at either 19% (profits under £50k) or the main rate of 25%. Returns on investments are taxed at these rates rather than at an individual’s marginal income tax rate. Where dividend income is received from equities held by the FIC, these are usually tax free when received from a company. Rentals received on investment property are taxed at the corporation tax rate and companies may still deduct loan interest from the rental income.

Income Tax

The purpose of the FIC is to accumulate family wealth in a tax efficient manner and therefore the longer the returns are held in the FIC, the better. When returns are taken out, though, they are taxable in the hands of the shareholders either as a dividend (at the dividend tax rate) or where loans are being repaid and the loan is interest free. There are ways to mitigate income tax and how returns are distributed to family members and advice should be taken on the different scenarios, for example paying university fees to over-18s.

Capital Gains Tax

If the FIC sells any of its assets, the gains are included in the corporation tax return of the FIC and taxed at the corporation tax rate (usually 25%).

If the FIC is wound up (and assuming a members’ voluntary liquidation) the shareholders pay capital gains tax at 20% on the value of the assets distributed to them.

If the FIC is sold by way of a share sale, this too is a capital event and consideration received for the sale of the shares is taxed at 20%.

Since both a winding up and a share sale are capital events, Business Asset Disposal Relief may be available to reduce the rate from 20% to 10%.

Inheritance Tax

If properly structured, assets transferred to or loaned to a FIC will not generate an upfront Inheritance Tax charge – a key differentiator between FICs and the regime applicable to trusts.

Assets held in FICs are usually “investments” and so do not attract relief for Inheritance Tax purposes. However, FICs can operate as an effective vehicle for Inheritance Tax planning, as value can be passed onto future generations through the creation of new share classes for their benefit.

Gifts to the next generation would be subject to the usual seven-year rule, and so would fall out of the donor’s estate if they survive seven years from the date on which the gift is made. There are also opportunities to structure share classes tax efficiently so that any future growth in value accrues outside the donor’s estate for Inheritance Tax purposes.

FICs provide the opportunity for directors to retain control over the gifted shares, which is often extremely helpful in an estate planning context.

Summary

For many individuals, portfolios and family investment structures, the future is uncertain until clarity is provided on where the tax burden will increase under the new Labour governments fiscal plans.

Professional advice should be sought and the team at Michelmores can help. The needs of families and their planning objectives differ from family to family and we can guide you through the initial stages of structuring the company to implementation and ongoing corporate filing and secretarial assistance.

Please do get in touch with Cathy Bryant, Iwan Williams, Chris Smedley or any member of the Michelmores team if we can assist.