Setting up a family investment company (FIC) is your key to securing your family’s financial future. Why set up a family investment company? This guide covers the benefits, steps and strategies. Get ready to protect your assets, simplify your tax position and ensure smooth wealth transfer to the next generation – all through the lens of setting up a Family Investment Company, or in other words, setting up family investment company.
Summary
- A Family Investment Company (FIC) needs a bespoke structure with share allocation and governance to manage family wealth properly.
- FICs offer tax benefits like lower corporation tax rates, exemption from tax on dividend income between companies in the structure and opportunities for inheritance tax planning through gifting shares.
- Funding an FIC properly is crucial, with tax implications of transferring assets or cash, loan arrangements and interest expenses and stamp duty and other transfer costs to consider.
Setting up a Family Investment Company (FIC)
Setting up a family investment company (FIC) is about building a solid foundation for your family wealth. It’s a process that starts with a formal company formation, moves through share allocation and ends with governance and control mechanisms that match your family’s goals.
Every family is different when it comes to setting up a FIC, it’s all about the bespoke structure and setup.
What type of FIC
UK limited companies are the most popular choice for family investments because of limited liability and tax benefits. The safety net of limited liability means your personal assets are protected from any financial storms the company may face.
And the tax planning benefits of a limited company structure means a brighter future for the FIC, so a great option for UK based families looking to grow their family wealth.
Share allocation to family members
Share allocation within an FIC is a sensitive process that needs to be carefully considered for each family member’s share. Parents can hold onto the captain’s chair with shares that have control, while the younger generation can enjoy the dividends with parental approval.
This way wealth transfer within the family will be smooth, risk free and growth orientated and preparing for the day the next generation is ready to take the helm.
Governance and Control
Within an FIC the founder can maintain control without having to tie this to dividend distribution. By separating voting rights or amplifying the powers of directors the founder can:
- Set the direction of the company
- Decide on investments
- Decide on dividend flows
- Create a governance structure that will stand the test of time and tide.
Tax and Benefits
FICs often benefit from tax advantages like lower corporation tax rates, exemption from tax on dividend income and inheritance tax planning for inheritance tax purposes. These benefits mean your wealth will be safely moored and growing without the weight of higher personal income tax rates. But as any seasoned captain knows, understanding the tax implications and tax consequences when extracting profits is key to make sure the overall tax burden doesn’t outweigh the benefits of having an FIC.
Corporation Tax
As a corporation FICs benefit from lower tax rates than personal tax. With profits taxed at 25% the ship of family wealth can accumulate its treasure in a more tax efficient way than personal tax which can rock the boat with higher rates. So FICs have to pay corporation tax to comply with tax regulations.
And the exemption of dividend payments from tax when flowing from one company to another within the FIC structure means profits can be re-invested at a lower tax cost, so the ship is steered towards a brighter horizon.
Capital Gains Tax and Dividend Income
Compared to individuals capital gains and dividend income of FICs are taxed at a much lower rate. Capital gains within an FIC are taxed at 19% corporate rate, much lower than the individual rate. And the exemption from corporation tax on dividend income received from UK and overseas companies is the icing on the cake, making it a tax efficient way to grow family wealth.
But when these dividends are distributed to shareholders they may face their own tax storms based on their personal tax brackets.
Inheritance Tax Planning
A Family Investment Company is a way to deal with inheritance tax. By gifting shares to other family members the founder can potentially avoid inheritance tax if they can weather the 7 year horizon post transfer. Such strategies can make an FIC a alternative to trusts and allow wealth to be transferred tax efficiently and make sure the treasure trove of family assets is intact for future generations to enjoy.
Fund your Family Investment Company (FIC)
An FIC needs to be funded which can be from gifts of assets or loans. As family members contribute to this cash flow they are putting resources into the FIC to grow and thrive. It’s not without its own set of considerations as the method of funding chosen can have different tax implications and costs that need to be navigated to ensure a smooth journey for the FIC.
Cash or Non-Cash Assets
Transferring cash or non-cash assets into an FIC is the starting point of its journey, whether by converting cash into shares or navigating the waters of director’s loans. But transferring non-cash assets like property can be a voyage into financial reefs such as stamp duty land tax.
Direct transfers of investments can avoid the need to sell and the capital gains tax storms. But gifting shares soon after the company is created can be a safe haven from such tax implications.
Loan Arrangements and Interest-Free Loans
Loan arrangements provide a flexible way to extract funds from an FIC, an alternative to dividends. These loans when repaid bring back resources to the founders without the tax storm that dividends can create.
And the FIC can benefit from corporation tax relief on interest on business loans, making this funding mechanism even more tax efficient.
Stamp Duty and Other Transfer Costs
Transferring non-cash assets such as property or shares into an FIC can bring the financial currents of stamp duty or stamp duty land tax. These transfer costs need to be navigated carefully as they are an additional cost in the journey of funding an FIC and can affect the financial course for the company’s growth.
Asset Protection and Succession Planning
FICs are asset protection and succession planning structures, protecting family wealth from disputes and claims and preparing it for transfer to future generations. By anchoring wealth in the FIC structure families can create a governance that reflects their values and objectives and harness the tax efficient growth to sail towards a brighter future.
Structuring for Asset Protection
The Family Investment Company structure is designed to protect assets, separating control from economic interest and sheltering wealth from personal financial risks. With different types of shares founders can retain control while providing economic benefits to family members.
Provisions in the company’s articles can prevent unintended share transfers and add to the walls of defence against any claims on the family’s treasure.
Succession Planning
Succession planning in an FIC is like charting a course for future generations, so that wealth transfer is as smooth as the calm after the storm. Redeemable preference shares and gifting shares to family members can avoid immediate taxation and inheritance tax and create a clear passage for the family’s financial legacy to sail into the future.
Compliance and Reporting
FICs need to keep detailed records like a ship’s logbook to comply with annual tax and corporate filings which are part of the public record. These filings not only chart the company’s financial journey but also ensure the company is on the right side of the regulatory currents and don’t run aground on non-compliance.
Annual Tax and Corporate Filings
Family Investment Companies as captains of their financial ship are required to navigate the bureaucratic seas of Companies House and file annual accounts that reveal all their financial dealings to the world. While these accounts are a public record of the company’s progress options exist to sail into calmer waters such as filing abridged accounts or structuring the FIC as an unlimited company for more privacy.
Corporation Tax Rates and Deductions
FICs need to navigate corporation tax rates and deductions with operational expenses and interest on loans as the navigational tools to reduce their tax liability. Using the corporation tax deduction wisely allows the FIC to optimize its tax position so more of its wealth is reinvested in the company’s growth rather than being lost to the tax tides.
Diversifying Investments within the FIC
A Family Investment Company does more than just protect family wealth, it opens up a world of investment opportunities. From property to financial instruments to art or classic cars, diversifying the FIC’s portfolio is key to riding out market storms and growing capital. But with diversification comes the need for a captain’s keen eye on the tax implications of each investment so the FIC’s course remains true.
Risk and Growth
Balancing the investment portfolio within an FIC is the art of navigating between the two pillars of risk and growth. Over concentration in one area can lead to rough seas, while too much diversification can spread the sails too thin and dilute performance.
A careful choice of assets and share types can help navigate these waters and get the wind in your sails while avoiding the storms.
Corporation Tax Relief
An FIC can use the corporation tax relief to their advantage. By claiming interest on business loans and bank charges the FIC can reduce its tax liability and have more resources to invest in the company.
These strategies will ensure the company uses every available current to propel its investments forward and optimise the voyage for tax efficiency and capital growth.
Conclusion
As we’ve navigated the complexities of Family Investment Companies, it’s clear setting up an FIC requires not only a map but also the foresight to chart a course through legal, tax and financial waters. With the right structure, tax strategies and investment diversification an FIC can be a powerful tool for protecting and growing family wealth. May this journey inspire you to take the helm and steer your family’s financial legacy into new waters of prosperity.
FAQs
What is a Family Investment Company (FIC)?
A Family Investment Company (FIC) is a private limited company that manages and grows family wealth through tax planning, asset protection and succession planning, providing a formal way for family members to invest together while maintaining control over asset and income distribution.
How do FICs compare to personal ownership?
FICs offer tax benefits through lower corporation tax rates, tax free dividends, lower capital gains tax rates and inheritance tax planning through share transfers to family members. They are more tax efficient than personal ownership.
Can you explain the tax difference between dividends received by an FIC and dividends paid to shareholders?
When dividends are received by an FIC they are usually tax free, so tax efficient wealth accumulation. When dividends are paid to shareholders they are subject to their personal income tax rates.
What are the considerations when transferring assets to an FIC?
When transferring assets to an FIC you need to consider the taxes and costs involved, such as stamp duty land tax for property and capital gains tax for shares as the FIC is a separate legal entity.
How does an FIC protect assets and plan for succession?
An FIC protects assets by allowing parents to retain control while distributing the economic benefits to family members through different share classes. It also plans for succession by structured wealth transfer to future generations and tax efficient gifting.
