Ilyas Patel Accountants in Preston
Ilyas Patel Accountants in Preston
Family Investment Companies (FICs) are rising in popularity as powerful tools for high-net-worth families seeking robust strategies for tax efficiency and succession planning.
FICs offer a flexible way to manage wealth transfer while safeguarding family assets, making them a favoured structure for those looking to protect their legacy.
With their unique benefits, however, come specific requirements to ensure they are structured to maximise these advantages effectively.
Here’s a look at the workings of FICs and how they can benefit family wealth planning.
(Read Time: Approx. 3 minutes)
A Family Investment Company (FIC) is a private limited company established to hold, manage, and transfer wealth within a family.
This structure allows senior family members to maintain control while transferring economic benefits to younger generations.
Importantly, FICs can serve as an alternative to trusts, with benefits such as reduced inheritance tax (IHT) and greater flexibility around tax planning.
A FIC typically comprises shares of varying types to ensure controlled distribution of wealth, often funded by a mix of equity and interest-free loans.
For example, a parent may hold A-shares with voting rights but no dividend rights, while children hold B-shares with dividend entitlements.
Such a structure enables parents to retain control over decision-making, while profits and asset growth benefit the younger generation, often without triggering immediate IHT liabilities.
One of the main tax advantages of FICs lies in IHT planning. By transferring assets into a FIC, families can potentially sidestep immediate IHT charges, especially if the seven-year survival rule is met.
Under this rule, gifts to family members (like B-shares) can be exempt from IHT if the original donor lives for seven years post-transfer, allowing for significant tax savings on wealth passed to children or grandchildren.
Corporation tax is imposed on FICs based on profit levels, with rates varying from 19% for profits under £50,000 to 25% for those over £250,000, with marginal relief bridging these rates.
This setup often proves more tax-efficient than higher individual income tax rates, especially for those in high tax brackets.
Additionally, FICs may deduct bank charges or loan interest for business expenses, further enhancing tax efficiency for the family’s wealth management.
When assets are transferred into an FIC, CGT may apply to the transferor, especially if the assets have appreciated in value.
The FIC, however, pays CGT on any future disposals at the prevailing corporation tax rate.
Importantly, by using loan funding for asset acquisition within the FIC, families can often reduce CGT impacts over time.
Dividends within the FIC structure receive favourable treatment.
Dividends received by the FIC are tax-exempt, though shareholder distributions incur tax on recipients based on their personal circumstances.
The dividend tax allowance, set at £1,000 in 2023–24, allows a buffer for tax-free earnings, with subsequent rates ranging from 8.75% to 39.35%, making FICs especially beneficial for families with younger adult shareholders.
Parents can tailor the FIC’s structure, retaining control over assets while transferring economic benefits to their children, who receive dividend entitlements.
Such flexibility allows adaptation to each family’s unique financial goals and circumstances.
FICs offer distinct advantages in inheritance planning, bypassing IHT on specific asset transfers to younger generations, assuming the donor lives for the required seven-year period.
Since FICs are separate legal entities, they provide an extra layer of protection for family assets, helping to insulate them from individual liabilities.
They are also valuable for shielding assets in case of divorce or creditor claims, which can be particularly beneficial in succession planning.
While FICs offer advantages, they are not without downsides.
Profits retained in the company may be taxed at both the corporation and dividend levels if paid out to shareholders.
However, keeping profits within the FIC can mitigate immediate tax implications, allowing for reinvestment.
Transferring non-cash assets into a FIC could incur CGT for the donor, and potential Stamp Duty Land Tax (SDLT) if the transfer involves a mortgage.
Families must carefully structure these transfers to avoid unintended tax burdens.
FICs require ongoing maintenance and record-keeping to remain compliant with tax regulations, which can be burdensome, especially without professional guidance.
FICs provide a strategic pathway to protect and pass on wealth, offering tax advantages and operational flexibility.
However, the decision to establish a FIC requires careful consideration of its benefits and drawbacks, particularly in relation to family dynamics and long-term objectives.
If considering a FIC, expert advice is essential to navigate the complexities and ensure compliance with tax laws.
Family Investment Companies present a compelling choice for families focused on wealth preservation, tax efficiency, and succession planning.
By enabling parents to maintain control while optimising wealth transfer to younger generations, FICs offer a potent mix of tax benefits and asset protection.
Yet, to unlock the full potential of FICs, careful structuring and professional guidance are indispensable.
Considering a FIC? Ilyas Patel Accountants is here to guide you.
With our in-depth knowledge and hands-on experience, we’ll ensure your FIC is tailored to meet your family’s specific needs, from tax implications to succession goals.
Fill out our form here for any questions, give us a call at 01772 920579, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel