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A Family Investment Company vs Trust is a practical consideration when choosing the best way to manage family wealth and assets in the UK.
While both structures offer benefits and drawbacks, choosing between them requires an understanding of their key features.
In this guide, we’ll explore the differences between FICs and trusts including what they’re for, how they’re taxed, and practical considerations.
When it comes to managing family wealth and assets in the UK, it’s important to consider whether a Family Investment Company or a trust is the better option.
Each structure has its advantages and disadvantages, so it’s crucial to have a solid understanding of their defining characteristics in order to make an informed decision.
In this guide, we’ll delve into the disparities between FICs and trusts, such as their purpose and tax implications.
Introduction
When it comes to tax savings, trusts are often promoted as the go-to option. However, Family Investment Companies are becoming more popular since they’re now considered more tax-efficient.
Trusts are still a viable option, though, especially if you want to maintain a level of control and flexibility when transferring assets.
However, for those who fall under the High Net Worth category, FICs are often the preferred choice. Discover the reasons why in this article.
Family Investment Companies
A Family Investment Company is a company that’s established and privately owned by a family to manage their wealth and assets.
As a result, family members have more control over their investments and assets, which is one of the primary advantages of an FIC.
An FIC can also provide tax-efficient wealth transfer and succession planning for family members, which is especially beneficial for families with substantial investment portfolios.
By transferring their assets to the FIC, they can leverage the company’s structure, which is often more tax-efficient than holding assets as an individual.
Furthermore, FICs offer flexibility in terms of distributing income and assets to family members, allowing for more effective tax planning.
Finally, FICs provide asset protection by holding assets in a limited liability company, shielding them from potential legal claims and personal liabilities.
Trusts
A trust is a legal arrangement that involves a trustee holding assets for the benefit of beneficiaries.
The trustee is responsible for managing the trust assets and distributing income and capital to beneficiaries based on the terms outlined in the trust deed.
Trusts are commonly used for estate and succession planning and, like FICs, can provide asset protection.
For instance, a family might set up a trust to manage their assets and investments. In this case, the trustee would manage the assets and distribute income and capital to beneficiaries based on the trust deed.
By transferring assets to a trust, a family can benefit from tax-efficient wealth transfer and succession planning, as well as asset protection.
One of the key advantages of a trust is its flexibility.
Trusts can be customised to meet the specific needs and goals of a family, providing greater control over asset management and distribution.
Moreover, trusts offer confidentiality since the details of the trust are not made public.
Family Investment Company vs Trust
In summary, trusts are generally less tax-efficient compared to Family Investment Companies since they incur higher rates of income tax, capital gains tax, and inheritance tax.
A Family Investment Company, on the other hand, can offer the same benefits as a trust while also providing tax incentives.
The objectives of Family Investment Companies are:
→ to manage family investments
→ to reduce taxes, given that they are taxed as a corporation rather than a trust
Trust | Family Investment Company | |
How it works | Holds assets | Essentially a private limited company |
Used for | Income, capital growth, or loans | Family estate planning purposes |
Set up by | The ‘settlor’ | The company founder |
Benefitted by | Beneficiaries | Shareholders who are usually family members |
Documentation | Trust deed/letter of wishes | Articles of association |
Tax-efficiency | Less tax efficient, particularly to gift assets in excess of a few hundreds of thousands | A common means of funding is the founder makes a loan and enjoys its repayment |
Taxation | Pays income tax (38%-45% on dividend income) | Taxed in the same way as any investment company, profits are subject to corporation tax (19%-25%) |
Taxation
It’s clear that FICs and trusts are subject to different tax treatments in the UK.
FICs are taxed as companies, while trusts are taxed as separate entities.
FICs are liable for corporation tax on their profits and gains, while trusts are subject to income tax and capital gains tax on their income and gains.
Nevertheless, both FICs and trusts can provide tax-efficient wealth transfer and succession planning.
FICs can distribute income and assets to family members in a tax-efficient way, while trusts can offer tax benefits through the use of trusts for specific purposes, like inheritance tax planning.
Examples
Suppose you wish to distribute your wealth to your extended family while minimising tax liabilities.
Instead of transferring money to a trust, which could trigger immediate inheritance tax charges, you decide to establish a new company with varying types of shares owned by multiple family members.
You provide the company with an interest-free loan, and it invests the funds in a portfolio of residential properties.
Here are some factors to consider when establishing your Family Investment Company:
Asset Contribution: How much money will you contribute? What will your FIC invest in?
Type of Business: Will it be a limited or unlimited company?
Different Share Types: How much influence do you want each individual to have?
Conclusion
FICs and trusts are two of the most widely used structures for managing family wealth and assets in the UK.
Although both structures have their advantages and disadvantages, selecting between them requires a thorough assessment, and consulting a Tax Expert is critical.
FICs provide tax-efficient wealth transfer and succession planning, as well as asset protection and flexibility.
Trusts offer comparable benefits, such as tax advantages and flexibility, but can be more complicated and expensive to establish and manage.
When choosing between an FIC and a trust, it’s important to assess your specific needs and objectives.
For instance, trusts have a unique advantage over FICs in that they can benefit individuals who have not yet been born.
With the assistance of a Tax Expert, it’s feasible to create a tailored, blended solution that incorporates the benefits of both structures.
Contact us here and we’ll get back to you!