Background
Mr and Mrs Hughes have successfully run a marketing company together for over 10 years and are now looking to sell part of the business. Alongside their trading company, they have built an investment portfolio and own two commercial properties, which they lease to their company. All assets are jointly owned.
As they plan for the future, Mr Hughes is exploring ways to:
Protect and grow their family’s wealth.
Ensure tax-efficient wealth transfer to their children.
Invest in additional commercial properties for passive income.
Family Investment Companies – What Are They?
A Family Investment Company (FIC) is a holding company with bespoke alphabet shares, typically structured into four main types:
| Share Type | Purpose |
|---|---|
| Voting Shares | Nominal value, providing control over the FIC. |
| Freezer Shares | Fixed value, ensuring certain assets do not increase the parents' estate value. |
| Growth Shares | Capture future increases in the value of the FIC, shifting wealth to the next generation. |
| Dividend Shares | Allow flexible dividend distributions to different family members. |
Did you know?
FICs have gained popularity in recent years, often viewed as a hybrid between a holding company and a discretionary trust. This structure provides more flexibility and tax efficiency than either a standalone holding company or a trust.
Current Financial Overview
| Assets | Value |
|---|---|
| Marketing Company (100% owned) | £4 million |
| Annual Company Profits | ~£300,000 |
| Commercial Properties | £1 million |
| Main Residence | £800,000 |
| Recently Inherited Assets | £1.5 million |
Mr and Mrs Hughes draw a £12,570 salary each and take the rest as dividends, often exceeding £100,000 annually.
Their company shares qualify for 100% Business Property Relief (BPR) up to £1m each, as per the 2024 Autumn Budget.
Upon selling their business, both qualify for Business Asset Disposal Relief (BADR).
Potential Advantages of a Family Investment Company
Using an FIC could offer several benefits:
✅ Lower Tax on Retained Income – Rental and dividend income within the FIC is taxed at a lower corporation tax rate (up to 25%), compared to the 39.35% personal dividend tax rate.
✅ Efficient Wealth Transfer – Potentially exempt transfers mean that, if Mr and Mrs Hughes survive for seven years, the transferred assets would be fully exempt from inheritance tax (IHT).
✅ Future Growth Outside the Estate – As the company’s value increases, growth shares ensure that the rise in value is passed to the children, without increasing the parents’ taxable estate.
✅ Flexible Dividend Distribution – Dividend payments can be directed to the children while they are at university, ensuring income is taxed at lower rates (or potentially not at all).
Most Importantly
Mr and Mrs Hughes would retain full control of the company and its assets through voting shares, while benefiting from structured wealth planning.
Agreed Action
1. Structuring the FIC
Mr and Mrs Hughes wanted their children to benefit from future growth without gifting assets outright. Their plan included:
Forming an FIC and selling each child a dividend share for £1, allowing them to receive income while at university.
Selling their two commercial properties to an SPV of the FIC in exchange for £500,000 of freezer shares.
Exchanging £4m worth of marketing company shares for freezer shares in the FIC, ensuring their estate does not increase.
Selling growth shares to a discretionary trust for £1 each, shifting future increases in value outside their estate.
2. Protecting Assets with an Employee Benefit Trust (EBT)
To further optimise their estate:
An EBT was established to gift £2.5m of freezer shares, reducing Mr and Mrs Hughes’ BPR-qualifying shares to £1m each.
They retained £1m of freezer shares each, ensuring they could redeem them during retirement or pass them on IHT-free via their will.
Company Structure
| Share Type | Holder | Purpose |
|---|---|---|
| A Voting Shares | Mr & Mrs Hughes (49 each) | Full control over the FIC. |
| B Voting Shares | Children’s godparents | Golden shares to protect family control from creditors, divorce, or probate issues. |
| D Freezer Shares | Mr & Mrs Hughes | Used to buy the commercial properties. |
| E Freezer Shares | Mr & Mrs Hughes | Used to exchange shares in the marketing company. |
| G Growth Shares | Initially Mr & Mrs Hughes, later sold to a discretionary trust | Ensures future value growth is outside their estate. |
| I, H, J, K Dividend Shares | Various family members | Allow different dividend distributions each year. |
Final Outcome
✅ Full Control Maintained – Mr and Mrs Hughes retain control over the FIC through their voting shares.
✅ Tax-Efficient Wealth Transfer – Freezer and growth shares allow their estate value to remain within BPR and IHT limits.
✅ Lower Tax on Rental Income – The rental income on the commercial properties is taxed at 25% corporation tax, rather than personal rates.
✅ Increased Investment Potential – The family can reinvest in commercial properties more effectively, using pre-corporation tax income rather than post-tax income.
✅ University Funding for Children – The children can receive dividends and salaries from the marketing company and FIC, covering their education and living costs.
By restructuring their wealth through an FIC, Mr and Mrs Hughes have created a robust, tax-efficient structure that safeguards their financial future while benefiting their family for generations to come.
