Family Investment Companies – Are they right for you?

With an increasing focus on Inheritance Tax (IHT) and upcoming changes to the rules around trusts, wealthy families are exploring new methods of investing and protecting their assets.

One increasingly popular method for achieving this is through the foundation of a Family Investment Company (FIC).

What is a Family Investment Company?

A Family Investment Company is a private limited company structured to hold and manage a family’s assets, such as shares, property and investments.

It provides a formal yet flexible framework for controlling and growing wealth, with the added benefit of facilitating the tax-efficient transfer of assets to future generations.

The FIC serves as a vehicle through which parents can allocate shares to their children, potentially reducing their IHT liabilities under the ‘seven-year rule.’

Setting up an FIC

Creating an FIC involves allocating company shares to family members, which effectively begins the seven-year countdown for IHT purposes.

For instance, a parent with an £8 million estate might establish an FIC, distributing three-quarters of the company’s shares equally among their three children while retaining one-quarter.

This action shifts £6 million out of the parent’s direct ownership, thereby lowering the potential inheritance tax burden.

Advantages of Family Investment Companies

Here are some advantages of FICs:

1. Tax efficiency: FICs can offer tax advantages. By using shares and the seven-year rule, FICs can help mitigate IHT due.
2. Control: Directors maintain control over the assets and investment decisions within the company, which ensures that family wealth is managed according to the long-term interests of the family.
3. Flexibility: Unlike trusts, which have become less tax-efficient due to recent tax changes, FICs offer a more adaptable solution for estate planning.
4. Asset protection: FICs provide a clear legal structure that can protect family assets from external claims and personal issues, such as divorce or bankruptcy.

Downsides of Family Investment Companies

Whilst there are many benefits to FICs, there are also disadvantages to be aware of:

1. Complexity: Setting up and managing an FIC requires significant legal and financial expertise, potentially leading to high initial and ongoing costs.
2. Regulatory compliance: As limited companies, FICs are subject to corporate governance and reporting requirements, which can be burdensome.
3. Limited tax benefits for income and gains: While FICs can be efficient for inheritance tax purposes, other taxes like income tax and capital gains tax still apply. Effective management is required to minimise these liabilities.

As with any financial planning tool, the suitability of an FIC depends on individual circumstances and goals. To learn more about FICs, please speak to our team.