Article by Russell Hammond FPFS FCSI – Chartered Financial Planner & Chartered Investment Adviser
Fellow of the Chartered Insurance Institute & Chartered Institute of Securities & Investment
Wealth succession planning is vital for high net worth families looking to ensure that their amassed wealth not only remains within the family but also benefits from favourable tax conditions. Enter the Family Investment Company (FIC), a UK-based private company structure created to hold and manage family wealth. Understanding the nuances of FICs can illuminate their role in generational wealth transfer and demonstrate how they can be a potential tool against the hefty implications of UK Inheritance Tax (IHT).
Structural Overview of FICs
At its core, a Family Investment Company is a bespoke vehicle designed to hold, manage, and invest family wealth. Structured as a private company limited by shares, FICs allow family members to be shareholders. The company’s articles of association are usually drafted specifically to meet the unique needs and circumstances of the family, giving the desired level of control over investments and distributions.
Creating Different Share Classes
One of the key features that make FICs flexible for family wealth management is the ability to create different classes of shares. These classes can have varying rights attached to them, making it easier to allocate wealth and control among family members according to their needs, ages, and roles.
For instance, the common classes of shares in FICs include:
- Ordinary Shares: These may carry voting rights, entitlements to dividends, and rights to capital on a winding up of the company.
- Preference Shares: These typically have a right to a fixed dividend before any dividend is paid on the ordinary shares but may not carry voting rights.
- Growth Shares: These may not entitle the holder to dividends in the early years but would participate in any increase in the value of the company above a certain level.
By creating these different classes of shares, families can design a structure where older generations retain control of the company (through voting rights) while younger generations benefit from the growth in the value of the company.
Transfer of Shares and Shareholder Rights
Shares in an FIC can be gifted or sold to other family members, allowing wealth to be transferred down the generations without immediate tax implications. However, there’s a key distinction between the two:
- Gifting shares: This will be a potentially exempt transfer for IHT purposes. As long as the donor survives for seven years after the gift, there will be no IHT payable.
- Selling shares: If shares are sold rather than gifted, the selling price would need to be at market value to avoid unwanted tax consequences. The proceeds can then be loaned back to the FIC or used by the older generation, possibly for IHT planning.
Shareholder rights are typically laid out in the company’s articles of association. It can delineate who has voting rights, entitlements to dividends, and how decisions are made. With careful planning, it ensures that control remains where desired, such as with the senior family members, while economic benefits flow down the generations.
Benefits for Multi-Generational Wealth Succession
FICs offer numerous benefits for families seeking structured, tax-efficient ways to pass on wealth:
- Control and Protection: FICs allow for the centralisation of family assets under a controlled management structure. Older generations can maintain control of the assets while gradually transitioning the economic benefits to younger generations.
- Tax Efficiency: FICs are subject to corporation tax on their income and gains, which can be lower than higher rates of income tax that might apply if assets were held personally. Moreover, when managed appropriately, FICs can, as mentioned above, help reduce the IHT liability.
- Flexibility: The bespoke nature of FICs means they can be moulded to fit the unique requirements and dynamics of each family. The ability to create different share classes ensures wealth and control are distributed appropriately.
Reducing UK IHT with FICs
One of the major attractions of FICs is their potential to mitigate the impact of UK Inheritance Tax. Here’s how:
- Potentially Exempt Transfers (PETs): When shares in an FIC are gifted, they are regarded as potentially exempt transfers. If the donor survives for seven years post the gift, no IHT is due.
- Loan Arrangements: An older generation might sell assets to the FIC in exchange for a loan. As the FIC repays the loan, the older generation’s estate is reduced, thus lowering potential IHT liabilities.
- Growth Outside of the Estate: By transferring assets into an FIC, any future growth in value of these assets is outside of the donor’s estate for IHT purposes.
Family Investment Companies present an innovative and flexible structure for UK families to manage, protect, and pass on their wealth across generations. By providing the means to maintain control, ensuring tax efficiency, and offering a bespoke approach to wealth distribution, FICs can be an essential tool in the intricate landscape of multi-generational wealth succession planning. When structured correctly, they offer a potent means to navigate the challenges of UK Inheritance Tax, ensuring that family legacies are not unduly eroded by tax liabilities.
Planning and Considerations for Implementing FICs
While FICs offer considerable benefits, they are not a one-size-fits-all solution. Implementing an FIC requires a thorough understanding of the family’s needs, dynamics, and long-term goals. Here are some considerations when contemplating the establishment of an FIC:
Engage Expertise
An FIC is a bespoke structure, and getting it right from the outset is essential. Engage tax advisers, lawyers, and financial planners familiar with setting up and managing FICs. They will help ensure that the company’s structure is tax-efficient, compliant with regulatory requirements, and aligned with the family’s objectives.
Open Lines of Communication
Transparent communication among family members is crucial. Everyone involved should understand the purpose of the FIC, the roles they will play, and the broader vision of the family’s wealth management strategy. Establishing an FIC is not just about the financial structure, but it’s also about fostering trust, unity, and shared purpose within the family.
Regular Review
The economic environment, tax regulations, and family circumstances can change. Therefore, it’s essential to review the FIC’s structure and strategy regularly. For instance, if the tax regime changes or if the family’s asset portfolio grows in a particular direction, the FIC might need adjustments to remain optimal.
Diversify Investments
An FIC provides a platform to diversify investments. With a consolidated pool of family wealth, it’s possible to venture into various investment opportunities. A diversified portfolio can reduce risks and potentially yield better returns.
Consider International Elements
For families with international connections, it’s essential to understand the tax and legal implications in other jurisdictions. If family members live abroad or assets are held overseas, cross-border tax implications and legal structures need to be considered when structuring the FIC.
Challenges of FICs
It’s also essential to be aware of potential challenges:
- Complexity: Establishing and managing an FIC can be intricate. The bespoke nature of the structure means that it requires careful planning and ongoing management to ensure it remains compliant and effective.
- Costs: Setting up an FIC involves initial costs, such as legal fees and adviser charges. There are also ongoing costs, like annual accountancy fees, which families must weigh against the potential benefits.
- Regulatory Scrutiny: As with any entity designed for tax efficiency, there is always the potential for future regulatory scrutiny or changes in tax legislation that could affect the benefits of FICs.
In the world of wealth succession planning, Family Investment Companies have emerged as a powerful tool. For families who wish to maintain control of their assets, ensure the strategic passage of wealth across generations, and navigate the challenges of UK Inheritance Tax, FICs offer a compelling solution. However, as with any financial structure, they come with their complexities and challenges. Proper planning, expert advice, and regular review are crucial to ensure that an FIC remains a robust vehicle for generational wealth transfer.