Family Investment Companies (FICs) have steadily grown in popularity among high net worth individuals, both UK domiciled and non-domiciled. These structures offer an attractive means of managing and controlling family wealth in a tax efficient manner, while providing benefits like wealth preservation and succession planning.
At its core, a Family Investment Company is a private company whose shareholders are family members. FICs are designed to hold and manage investments, rather than carrying out a trade. They can be particularly attractive to high net worth families because they allow parents (or grandparents) to retain control of their assets while transferring value to younger generations.
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Advantages of FICs for High Net Worth Individuals
For high net worth individuals in the UK, the advantages of FICs are manifold. FICs offer flexibility with regard to who controls the company and its assets. They can provide a means of passing on wealth to the next generation while allowing the founder to retain a level of control. This is often achieved through the use of different share classes, which can have different voting and dividend rights.
From a tax perspective, FICs can be advantageous. For instance, corporation tax rates, which apply to FICs, are typically lower than income tax rates. Corporation tax rate is set at 19% – 25% (2023) in the UK, while the highest rate of income tax is 45%. In addition, FICs offer the opportunity to roll up income and gains, as retained profits within the FIC are not subject to further taxation until distributed.
FICs also offer considerable inheritance tax (IHT) benefits. In particular, provided shares are gifted to family members and the donor survives seven years from the date of the gift, the value of the shares falls outside of the donor’s estate for IHT purposes. The seven-year rule can often be mitigated by insurances, making FICs an attractive IHT planning vehicle.
Relevance of FICs to UK Domiciled and Non-Domiciled Residents
FICs can be relevant to both UK domiciled and non-domiciled residents.
For UK domiciled residents, the IHT and succession planning benefits of FICs are obvious. Furthermore, the corporation tax benefits make FICs an attractive vehicle for investment and wealth management. With careful structuring, a FIC can be an effective tool to manage, preserve and grow wealth within a family, and to pass wealth on to younger generations in a tax efficient manner.
For non-domiciled residents, FICs can offer a degree of protection from UK tax. Non-domiciled individuals are typically subject to UK tax only on their UK income and gains. By using a FIC to hold UK investments, it is the FIC (and not the individual) that is liable for corporation tax on the income and gains. Thus, by setting up a FIC, non-domiciled individuals can potentially shield their personal income and gains from UK tax.
However, non-domiciled residents should be aware of the deemed domicile rule. This rule means that after being resident in the UK for 15 of the past 20 tax years, an individual becomes “deemed domiciled” in the UK for all tax purposes. This has implications for the use of FICs, as it could mean that all worldwide income and gains become subject to UK tax, on the arising basis in the same way as individuals who are actually UK resident and UK domiciled.
Considerations for Setting Up a FIC
There are several key considerations when setting up a FIC. Firstly, the setup and running costs of a FIC can be significant, so it is important to consider whether the tax and succession planning benefits outweigh these costs.
Secondly, one needs to think carefully about the structure of the FIC and who will own and control the shares, and what rights those shares will have.
Structuring the FIC with different classes of shares can provide flexibility and control. For instance, the founder may retain voting shares, thus maintaining control of the FIC, while family members are gifted non-voting shares, allowing the value to be passed on without surrendering control.
Thirdly, there are legal and regulatory considerations. Companies are subject to company law and financial regulations, so it is crucial to ensure that these requirements are met. It’s also critical to think about disclosure requirements; although private companies are not subject to the same disclosure obligations as public companies, there are still requirements to file accounts and other information with Companies House.
Optimal Use of FICs
The real strength of a Family Investment Company lies in its adaptability. Since it’s a bespoke entity, it can be designed to address specific family needs, and it’s where it truly shines. For instance, FICs can hold a broad array of assets, including cash, property, stocks and shares, and even interests in other businesses. This flexibility allows the high net worth family to consolidate and manage diverse assets in a more cohesive way.
Beyond that, FICs are an excellent tool for educating younger generations about financial management and stewardship of the family wealth. Given the ability to allocate shares (and therefore decision-making input) across generations, the FIC environment can foster greater involvement, learning, and ultimately responsible wealth management.
Additionally, FICs offer strong protection against creditors, as assets within the FIC are separate from the personal assets of the family members. This provides an additional layer of security for the family wealth, thereby ensuring long-term preservation.
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 Summary
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.