Potential Drawbacks and Pitfalls
Like any financial structure, FICs are not without their potential downsides. Care must be taken to avoid possible pitfalls. If improperly managed, a FIC could potentially become a source of family conflict. The transfer of wealth and decision-making power within a family can often lead to disagreements, and the structure of the FIC may contribute to this if not thoughtfully planned.
Tax planning is another area where attention to detail is paramount. Without careful planning, the family could be at risk of facing unforeseen tax liabilities. For instance, the extraction of funds from the FIC may lead to income tax or dividend tax liabilities. A professional adviser should always be consulted in such matters to ensure the most tax-efficient strategies are employed.
For non-domiciled individuals, the use of a FIC needs to be carefully considered in the context of the deemed domicile rule and any potential remittance basis charges. Missteps here could result in unexpected tax consequences.
It is also important to consider the impact of a FIC on the family’s overall tax position. The corporation tax benefits of a FIC must be balanced against potential tax charges when profits are distributed. Depending on the circumstances, other wealth management structures, such as trusts, might be more appropriate.
One should also consider how a FIC fits into their broader succession planning strategy. While FICs can offer significant benefits in terms of passing on wealth to the next generation, it is important to think about the implications for family dynamics and governance.
The Role of Advisors
Given the complexity of establishing and managing a FIC, the role of professional advisers can’t be underestimated. Legal, tax and financial advisers can help ensure the FIC structure is the most suitable for the family’s circumstances, and that it complies with all necessary regulations and reporting requirements. They can also help navigate complex family dynamics and governance issues, providing guidance on how best to structure and manage the FIC for the benefit of all family members.
In conclusion, Family Investment Companies offer a highly flexible and efficient vehicle for wealth management and succession planning for high net worth individuals and families. The benefits they offer, from tax efficiency to control over assets and effective succession planning, make them an attractive proposition.
However, the success of a FIC relies heavily on its initial setup and ongoing management. It’s important that this is done in consultation with professional advisers, who can provide the necessary expertise to ensure the FIC is structured and operated in the best interests of the family.
While FICs are not a one-size-fits-all solution, for the right family circumstances, they can offer an exceptional tool for preserving and growing wealth, while fostering intergenerational involvement and education around the family’s financial legacy. Therefore, for high net worth families, both UK domiciled and non-domiciled, a FIC could be a prudent addition to their financial strategy.