Family Investment Company (FIC) - A Complete Guide
How to use a Family Investment Company to eliminate inheritance tax, and reduce personal income & capital gains tax by using a combination of personal and corporate tax reliefs.
Article contents
Skip directly to the section that you would like to read, using the links below.
The last 50 years has seen a great number of families buying properties, starting businesses and saving for retirement without any fear of massive estate/inheritance tax, as it was only 3% fee similar to stamp duty. The higher estate/inheritance tax was for the 1% super wealthy at £1m back in 1950s, which is close to £50m in today’s money due to inflation.
The 1980s saw the introduction of inheritance tax (IHT) at 40% with pensions, farms and businesses excluded. For most families IHT could be avoided via a trust but 2015 changed the taxation of trust to 38-45%, with 20% entry charges above £325,000 and the 10-year 6% charge was in effect a wealth tax.
In the 2024 Autumn Budget, the inclusion of pensions in the IHT calculation now puts most middle-class families with £1m+ assets, saving, investments and pension into the 40% IHT bracket.
To prevent this a combination of Trusts, Investment & Trading companies can be used. However, this combination of multiple entities can become complex. The solution is a Family Investment Company.
What is a Family Investment Company?
A Family Investment Company (FIC) is a Holding Company that holds investments like shares in Private Trading Companies, potentially an investment account to hold reserves for a group of trading companies.
The main difference between a ‘Family’ Investment Company and a normal Holding Company is the various types of shares. Ordinary Common Shares have equal Voting, Capital and Dividend Rights, so when 100 Common Shares are issued, each one has 1% of the Voting, Capital & Dividend Rights. This means each share holds the control, capital gains tax (CGT) and IHT liability plus the income/dividend tax liability.
A FIC splits the Voting, Capital & Dividend Rights into separate classes and in turn separates the control from all the tax liabilities. Each tax liability can then be placed into a combination of more tax efficient entities outside of IHT calculations and lower income/dividend tax entities without giving up control of the FIC, therefore assets, by retaining the Voting control of the FIC and day to day management by being the director of the FIC.
What Assets can be added to a Family Investment Company?
Cash
Shares
Properties
Business Assets
Sole Trader or Partnership Business
A FIC be funded via cash loans or the purchase of shares. Shares in existing trading companies can be swapped in a share-for-share exchange of equal value, similar to a corporate merger. Properties, machinery or other business assets can be sold into a company in exchange for a loan. A trading business currently run as a sole trader or partnership can be incorporated into a company and then placed under the FIC in exchange for shares in the FIC.
Who Controls the Family Investment Company?
A FIC is controlled by the Voting Shareholders which in turn elect or fire the Directors which run the day-to-day administration of the FIC.
The A & B Class Voting Shares can have equal voting rights or one class can have more Voting Rights per share directly or indirectly via a Shareholders Agreement. Usually, the founders of the FIC that are putting in the majority of the starting capital and assets retain the A Class Voting Shares with a small number of B Class shares issued as a tie breaker ‘Golden Share.’ These Voting shares can all have nominal value of £0.01-£1 which are also redeemable, meaning the FIC can buy them back before they are potentially lost in a divorce, bankruptcy or death/probate. The Golden shares make sure that no one member has a majority to vote against the family’s interest to retain control in the family bloodline. The nominal redeemable value also prevents any IHT & CGT liabilities.
The use of Redeemable Preference shares for the capital and assets introduced in the FIC by the founders gives control of when these shares can be redeemed. Therefore, when the founder gifts these shares into trust to the family. The future voting shareholders can refuse to redeem, convert into cash, these shares if the family member doesn’t act according to the founders wishes or losses them in divorce, bankruptcy or death/probate. This gives another layer of control to the FIC and its voting shareholders.
Who Owns the Family Investment Company?
A FIC has different share classes with different rights. The Voting Shareholders control the FIC without holding the Capital Rights, therefore don’t hold/own the CGT & IHT liability, a Trust or 0% Tax entity owns the taxable capital shares. The Dividend shares are also nominal value £1 redeemable shares which can be gifted or sold to family members, trusts &/or 0% tax entities.
The initial capital introduced into the FIC can be held in Redeemable Preference shares and gifted to the family via Trust. Then used as a way to fund the purchase of property, cars, fund education etc. Given the Voting Shareholders and Board of Directors have to agree to redeem, convert to cash, these shares. The family can then encourage the shareholders, owners, to gift them into another trust, which redeems the cash and then lends them the funds. This protects the next generation, as these loans are outside their estate for Divorce, bankruptcy, IHT etc.
Therefore, the FIC can have many different shareholders that hold/own the many types of shares in the FIC, however ultimate control of the FIC remains with the Voting shareholders by in turn controlling the directors and if, when and how certain shares are redeemed.
What Taxes does a Family Investment Company Avoid and Save?
Avoid Inheritance Tax (IHT)
Avoid Capital Gains Tax (CGT)
Save on Higher Income Tax Brackets (40-45%)
Save on Corporation Tax
Save on Dividends Tax
Save on Withholding Tax on Foreign Dividends
A FIC can save on IHT in terms of passing on Wealth/Capital to the next generation by using Business Property Relief (BPR) from IHT. You can also avoid the 20% IHT tax charge on gifts over the Nil Rate Band of £325,000 (until 2030), this is done via the combination FIC and gifting shares with BPR into Trust rather than gifting cash or non-BPR shares/investments.
A Property Rental Business (5+ self-managed properties) can be incorporated into a FIC without paying Capital Gain Tax (CGT) via the use of incorporation relief, Stamp Duty Land Tax can also be avoided via the partnership route.
Income can be retained inside the FIC instead of all being paid out as salaries/income which can push people over into the higher income tax bracket when using a sole trader or partnership instead of a company. Retained company income is taxed at the lower 19-25% corporation tax rate.
A Group structure also allows for start up cost and losses within the Group Consolidated Accounts to offset profits in other companies, reducing the corporation tax of the FIC as a whole.
A Group structure also gives you access to Substantial Shareholder Exemption (SSE) when selling a trading company that the FIC owns 10%+ of the common shares. A SSE Sale of a trading subsidiary has 0% Corporation tax.
The dividends received by the FIC from trading subsidiaries is also tax free from any country. Some countries might charge a 5%+ Withholding Tax on the Dividend received by a company but that is usually more than 60-80% lower than an if an individual received the dividend.
The different shares classes with dividend rights allows higher tax bracket shareholder to decline a dividend each year and instead direct them to other family members with unused personal allowance directly cash or paid out in redeemable preference shares plus a Bare Trust can hold these redeemable preference shares until they are 18 – 25 years old building up a capital base with FIC still using the funds instead of a trustee. The redeemable Preference shares also give another layer of control to the family on when these shares are redeemed and cashed in.
How to Set Up a Family Investment Company
A Family Investment Company is usually setup by an experienced Barrister with Company and Commercial law experience in the High Courts along with a working knowledge of Trust Law and Equity in the Chancery Courts. This allows them to draft the companies’ founding documents in a way that allows the different share classes to be held in trust and create a solid foundation to which the family can build and maintain their wealth and legacy.
The FIC forms the core, as it is a beginning stages of forming a Family Office. The FIC starts out as a Bespoke Holding Company for the family with each class of share held tax efficiently. The founding family members receive the Voting shares which control the FIC. The founding directors oversea the process of adding funds and assets.
The existing trading companies and assets are valued then added to the FIC in return for difference classes of shares based on the asset type. These shares are then retained for future income or gifted into Trust to remove them from their estate in term of IHT liability.
Once the founder funds and assets are added to the FIC the directors maintain the basic annual administration and oversight of the existing trading companies along with paying out of dividends when required.
Flexibility on ways to expand and grow the family wealth via the FIC is built in from the start to allow the family to plan 3-5 years out right from the start in terms of succession planning and repayment of the initial funds provided by the founders. This plan can be formalised via the Shareholder Agreement with the support and guidance of the Barrister and consultants (Mural Crown).
How to Manage a Family Investment Company
A Family Investment Company is managed in the same way as other holding companies, they can either be Non-Trading Holding companies which are passthroughs to their shareholders with administrative costs paid for out of the trading companies that at 51%+ owned by the FIC. The FIC will then only need non-trading accounts and annual administration filed with Companies House.
A separate Administration company can be added under the FIC when management expenses for multiple trading companies is better off being centralised, this would be the beginnings of a Family Office to pay for the expenses of the family members expenses involved in the support and management of the day to day running of the multiple businesses along with expansion research and development. A Fiduciary company can also be added to provide a group banking and investment accounts to hold profits not paid out to shareholders or reinvested into the trading companies.
The other option is a fully trading Investment Business that manages Investments on behalf of the shareholders and has separate management accounts to capital investment costs. An annual management fee can be charged by the Trading Holding Company for services provided to manage the investments on behalf of the family and this is where you really start to form a Family Office with active investment managers potentially rewarded based on results. These rewards would be via a separate class of shares held by an Employee Benefits Trust.
The FIC can be as simple and straightforward to manage as you would like, with the flexibility built in, to expand and grow via more complex management systems.
Why use a Family Investment Company?
A Family Investment Company gives you access to same tax reliefs available to the multinational corporation that pay low single digit tax on their total profit. A FIC levels the playing field for you to create wealth and therefore a leave a Legacy for multiple generations to come. Teach the next generation on how to use the built-up capital/wealth correctly and you will have created a Perpetual Investment Entity to beat the 3 generations Curse of Poor-Middle-Rich, then Rich-Middle-Poor. A FIC creates a foundation that each generation can build upon to provide the capital to reduce the effect of inflation for your next generation. A way of reducing the stress of financial market uncertainty but without encouraging detrimental behaviours when handing over large sums without support, guidance and restrictions.
A FIC with multiple trusts can support the next generation in a way that encourages them to thrive, rather than become dependant.
Frequently asked questions
A Family Investment Company (FIC) gives you the ability to mitigate inheritance tax (IHT) in many ways, and when combined with estate planning it ensures your descendants do not lose control of the FIC or assets in divorce, bankruptcy or death.
The FIC give you access to:
Business Property Relief (BPR) of £1m each, as of 2024 Autumn Budget, then 50% discount over that.
Different types of trusts like Employee Benefits Trust (EBT),
Discretionary trust, bare trust and vulnerable people trust.
Private Trust Company (PTC) to act as corporate trustee for your family’s selection of trusts
When used correctly IHT can be totally mitigated plus estate planning along with succession planning
Alphabet shares, of which there is no limit, are created to give the family control over the FIC through voting shares, dividend income via multiple dividend shares for each family member and the ability to place the capital shares in trust to reduce capital gains tax and inheritance tax. Other share classes are tailored to each unique family requirement.
A Family Investment Company (FIC) is distinguished by its specialised share structure and governance framework. While both entities operate under company law, a FIC utilises alphabet shares, including control, freezer, growth, and dividend shares, alongside bespoke Articles of Association to optimise family wealth management.
FICs benefit from specific tax advantages through group consolidated accounts and Substantial Shareholders Exemption. Unlike standard limited companies, FICs can also be structured as unlimited companies, providing privacy by avoiding public account filing at Companies House.
A Family Investment Company (FIC) gives you access to a wide range of tax relief and planning techniques that are not available to standard companies or trusts. It is the combination of the FIC with trading companies and trusts that allows you substantial reduce you family’s tax liabilities. For example when structured correctly an FIC can:
· Reduce Inheritance Tax to Zero
· Receive Dividends tax free
· Sell shares tax free vis SSE
· Increase your IHT threshold via BPR
· Prevent paying 40-45% Income tax
· Manage multiple trusts cost efficiently
A FIC also opens up a wide range of options for you create a succession, estate and inheritance plan without losing control of the assets, as the founders can remain in control by holding the voting shares but without the CGT and IHT liabilities.
Need a confidential discussion?
Let us help you find an approach tailored to your requirements.
