How to Set up and Manage Family Investment Companies

When it comes to succession planning, a FIC presents an alternative option for tax planning and facilitating the transfer of assets across generations while maintaining a certain level of control.

Establishing a FIC provides the opportunity to transfer cash or assets into the company, enabling the inheritance tax-free passage of wealth, subject to a 7-year period. Moreover, retaining control over the assets during your lifetime is an added benefit.

Companies also present a more favourable tax environment for the growth assets. As a result, this method is frequently recommended to clients with substantial property portfolios, as it offers enhanced tax efficiency.

Setting up a Family Investment Company

The planning structure and strategy of a FIC will vary and is dependent on the circumstances of the owner and founder(s). The procedure for incorporating a FIC is the same as for any new company. If using a limited company, amended or entirely bespoke articles will be required – model articles of association for private limited companies are unlikely to be suitable for a FIC where families will want bespoke provisions tailored to their individual needs and family structure. If using an unlimited company, there are no applicable model articles and so long-form articles will be needed including all the provisions relevant for the company. For limited companies it is possible to use an online registration service but for unlimited companies paper forms are needed.

The introduction of assets in FIC

It is possible to either incorporate a FIC or convert an existing company into a FIC. If the existing company already holds assets and has value, care will be needed to ensure no tax charges arise because of any changes made to the existing structure.

In the case of an incorporation of a new FIC, The founder and owner of the FIC will usually either gift the assets or loan assets to it depending upon the nature of assets available and tax implications on the transfer into it.

Initial funding for a FIC can come from three sources – the initial share subscription, share issues or loans. Loans are often considered an attractive way to fund a FIC as a loan makes extracting funds from the FIC easy, as you simply repay the loan. Care needs to be taken to avoid making a gift to a FIC as such gifts may be chargeable lifetime transfers for inheritance tax purposes (broadly, potentially exempt transfers can only be made to an individual). Many loans to FICs are structured in such a way as to carry an entitlement to a commercial rate of interest. Whilst this can help avoid the potential for anti-avoidance legislation to apply, it can also be a tax efficient method of extracting profits.

The nature and types of company

Major consideration should be given as to whether the FIC is set up as a limited company or an unlimited company.

The major difference is that the unlimited companies are not required to file accounts at Companies House which helps to retain privacy over the family’s personal wealth.

On the other hand, unlimited companies do not have any benefit of limited liability for the shareholders, which is a major issue if the FIC goes on to make certain types of investments. For example, if the FIC invests in investment property (for capital accumulation) that is rented (for income accumulation), a limited company offers protection an unlimited company doesn’t, in that the risk of any claim by the tenants of the property is ring-fenced to the net assets of the company. For an unlimited company any claim is uncapped to potentially your entire wealth.

The different classes of shares

Put simply, a share is just a bundle of rights comprising of three different elements – a right to vote, a right to income and a right to capital. Rights can be separated out into different classes of shares which provide their holders with preferential rights to income, enhanced rights to capital or they can provide a mechanism by which capital can be repaid to shareholders on redemption (e.g. redeemable preference shares). The nature of the shares to be issued by the FIC to the founder(s) and the member of their family, and whether any voting rights are attached to them, will be one of the major considerations while setting up a FIC.

The type and nature of share distribution required help to determine not only the level of control that individuals can exercise over the FIC but also the way income and assets are distributed. The fundamental premise behind establishing a FIC is that the value and benefit arising from the growth of assets held in it are passed to future generations rather than being retained by the owners and founders, which helps to minimise exposure to IHT.

Managing a Family Investment Company

The way in which a FIC is managed, both strategically and on a day-to-day operational level, will mainly depend on the articles of association and shareholders agreements drawn up for FIC. These are tailored to the individual needs of the founder and their family members.

Typical Structures of FICs

A typical FIC set-up scenario is set out below:

The parents provide funds to a FIC in the form of either interest-free loans or by subscribing for preference shares. This will not be treated as a transfer of value for IHT purposes, and most importantly these funds can easily be extracted from this FIC later tax-free. Shareholders can charge commercial rates of interest on their loans; the interest is corporation tax deductible and provides a return to shareholders without any NIC costs.

The parents also subscribe to voting shares in the FIC, which will give them control of the company at the shareholder as well as board level.

The parents could also subscribe to a class (or classes) of non-voting shares. The parents then have an option to give non-voting shares to their children (preferably before significant value accrues to those shares). The gift at that point of time will not be subject to IHT, provided those parents will survive for seven years from the date of that gift. The non-voting shares of those FIC may pay dividends in the future.

The parents also have the option to put funds into a discretionary trust solely for the benefit of their children without triggering an IHT charge, to the extent that their annual exemptions and IHT nil rate bands are available. The parents should be irrevocably excluded from benefiting from this trust. The trustees then subscribe for a class of non-voting shares in the FIC at market value, i.e., at nominal value if the company is being newly created.

Conclusion

Setting up and managing a FIC can be a highly beneficial strategy for long-term wealth preservation and growth.

By consolidating family assets and leveraging collective expertise, a FIC provides a structured and efficient approach to managing wealth across generations. With careful planning, education, and a long-term perspective, a FIC can be a powerful tool for long-term wealth preservation and growth.

How ZEDRA can help

Our team of UK experts have considerable experience in providing advisory services for family investment companies. To find out more please contact one of our dedicated experts.