The benefits of setting up a Family Investment Company

Family Investment Companies (FICs) have become an increasingly popular wealth management solution for families in the UK. By setting up a FIC, you can benefit from tax efficiencies, asset protection, and the ability to pass on your wealth to future generations.

With a thorough understanding of the benefits, structuring, tax implications, and management of Family Investment Companies, alongside guidance from a professional advisor, you will be prepared to make a well-informed decision on whether a FIC is the right choice for you and your family.

• What is a Family Investment Company?
• What are the benefits of Family Investment Companies?
• Structuring a Family Investment Company
• Family Investment Company tax facts
• Managing a Family Investment Company

What are the benefits of Family Investment Companies?

FICs are advantageous for individuals looking for a tax-efficient way to transfer assets to their family. As an alternative to traditional estate and succession planning methods, Family Investment Companies are more versatile and offer a wide range of potential benefits including:

• Reduced tax liability: Establishing a Family Investment Company can provide significant tax benefits, including mitigating liability for income tax and inheritance tax.
• Personalised investing: FICs give more flexibility compared to traditional structures like trusts. With different types of shares and ownership structures, you can customise your investment strategies to match your family's needs and goals. This provides greater control over how assets are distributed.
• Proactive wealth planning: Family Investment Companies establish a clear succession and estate plan that reflects your wishes to help prevent any potential conflicts among relatives.
• Asset protection: By creating a Family Investment Company, you can safeguard your assets and protect them from legal liabilities and potential risks, providing a greater sense of security.

Structuring a Family Investment Company

When structuring a Family Investment Company, there are several important details to take into account to ensure it meets your family's objectives and complies with legal and tax regulations. You should address the following aspects:

1. Objectives - Establish the goals and objectives of the company, including its investment strategy, activities, and profit distribution.
2. Directorship - The appointment of directors is a vital part of creating a FIC as they oversee the day-to-day operations. Whether the director is a family member or a professional, it is important to establish guidelines covering their appointment, responsibilities and other relevant provisions.
3. Shares - Determine the shareholding structure of the FIC by deciding who will own shares and how many. Shareholders will be able to receive the distribution of income from dividends.
4. Articles of Association - This is a written contract agreed by the shareholders that ensures the FIC operates efficiently, effectively and legally - it outlines:
   • Rules for running the company
   • Company objectives and purpose 
   • Rights and responsibilities of shareholders/directors
5. Taxation - An FIC must be registered with HMRC and Companies House. Alongside filing an annual return, there are tax implications associated with setting up a FIC. This may include Corporation Tax, VAT and income tax, among other liabilities.

Simple Family Investment Company (FIC) structure example

Family Investment Company tax facts

Although Family Investment Companies (FICs) offer a tax-efficient approach to wealth management, it's important to remember that they are not entirely tax-free. This is why tax planning is critical when establishing an FIC, particularly where it includes highly-taxed investments.

Let's take a quick look at some of the potential taxes associated with FICs:

• Inheritance Tax: FICs provide a strategic solution for reducing Inheritance Tax (IHT) liability by transferring assets to the company without incurring any upfront or entry IHT charges.
• Corporation Tax: Family Investment Companies that generate annual gains exceeding £250,000 are subject to Corporation Tax which is currently set at 25% (2023/24) - comparatively a lower rate than the relevant Capital Gains Tax and income tax rates. For companies with gains under £50,000, there is a 'small profits rate' of 19% (2023/24).
• Capital Gains Tax: Although gains made within the Family Investment Company are subject to Corporation Tax, shareholders would still be responsible for paying Capital Gains Tax in the event of a company sale or disposal. It's worth noting that there are potential allowances and reliefs that could lead to a reduction in your tax bill.
• Dividends: Shareholders of a Family Investment Company are liable to pay income tax on the dividends they receive.

Managing a Family Investment Company

Effectively managing a Family Investment Company is crucial to ensure it operates smoothly. Those involved will need to pay close attention to detail, review investment strategy and regularly monitor its performance - responsibilities include:

1. Filing any necessary tax returns and documents
2. Making certain that investments align with objectives and goals 
3. Adhering to all legal and regulatory obligations to avoid potential risks and penalties
4. Producing and amending the Articles of Association and Shareholder's Agreement
5. Maintaining accurate financial records and preparing annual accounts
6. Monitoring and recording all income, expenses and investment transactions
7. Confirming that company directors are fulfilling their duties
8. Holding regular meetings to discuss the company's purpose

How can DSA Prospect help with FICs?

If you are looking to protect your family's assets, reduce your inheritance tax liability and increase control over your wealth, a Family Investment Company may be for you.

Partnering with a professional tax advisor is essential to make certain that your Family Investment Company is structured optimally for tax and compliance. Moreover, they can help pinpoint areas where potential savings or risks exist and provide guidance on how to address them.

By monitoring tax regulations and adapting the company's structure accordingly, DSA Prospect can ensure that your FIC remains tax-efficient and compliant, providing peace of mind for future generations.