Protecting family wealth - Family business or family investment?

In previous articles we have talked about the importance of business structure and succession planning to protect the wealth generated from a family business. A natural extension to this can be a family investment company.

A family investment company, or FIC as they are often known, is simply a company that invests rather than trades. This means it does not automatically benefit from some of the more generous Capital Gains Tax or Inheritance Tax reliefs where it stands in isolation. However, it can be used as a useful wrapper for a family to save income tax and Inheritance Tax in other ways.

There have been some concerns with FICs in recent years with HMRC setting up a dedicated task force to look in to them in more detail. The good news is this has now been disbanded with no concerns raised. So as far as the FIC world goes, it is business as usual.

What are they used for?

Typically, a FIC is used to invest in equities or property, funded by a cash loan from the founders, usually the parents. As an example; we are currently working with a family that have sold their family business and now have some cash to invest. As part of their wealth planning we are working with them to set up a FIC with themselves and their adult children as shareholders. A cash injection of around £5 million will be loaned to the FIC and invested in a mix of equites and property with the support of their financial advisor.

Here are some of the benefits.

• The income generated is charged at Corporation Tax rates rather than income tax rates, currently 19% compared to as much as 45% respectively.
• Income from equities can typically be tax free within a company increasing the tax saving and consequently the return on the investment
• Any growth in value of the investment is split between the shareholders, removing a proportion from the founder’s estate.
• Part of the loan can be given away to the children to increase IHT savings as this falls out of the founders’ estate after seven years.
• Profits can be drawn from the company tax free as a loan repayment.

In this case the FIC will be a tax efficient wrapper to house the investment and start passing wealth to the next generation. Control over the capital and income can remain with the parents but the children can get involved in investment decisions helping them acquire some financial experience for the future.

Why do business owners like them?

We find FICs are popular with family business owners. as the company structure is much more familiar than alternatives such as a trust. The FIC is typically managed in the same way as a business with a board of directors making all decisions. They also offer more flexibility as the funds are loaned to the FIC and can be repaid if necessary. This is not the case where they are settled in to trust.

To enable different family members to diversify their interests, FICs can also run alongside the trading business or, in some cases, be part of the group structure. Where the FIC does own shares in the trading company, this adds another level of flexibility as dividends can be paid to the FIC tax free.

It is important to remember that every family is different. A FIC should not be a ‘one size fits all’ approach or indeed the right answer for every family. The right structure can work really well and is something that should be considered as part of family wealth and succession planning.

For more information on this subject or to discuss your specific circumstances, please get in touch with Rebecca Durrant or your usual Crowe contact.