Many families incorporate family investment companies (or “FICs”) as part of their estate planning. An FiC is a company whose shares are owned by family members with the sole activity of holding investments.
The benefits of this include:
(a) the flexibility to access the capital you invest in the FIC;
(b) the ability to transfer value to your children or grandchildren whilst retaining control over the investments made and over “who receives what and when”;
(c) distributions to shareholders can be taxed at their lower rates;
(d) the corporate vehicle is one that is simple to understand and familiar to many; and
(e) since HMRC concluded in 2021 that there was no evidence to suggest that FICs presented a risk for tax purposes, the taxation of FICs is often viewed as predictable.
Clients increasingly ask us to help them resolve “FIC generated problems” and it is useful to be aware to these issues when creating a new FIC. Examples of recent problems include:
(a) The owner of the FIC wants to become non-resident
If the control of the FIC moves from the UK to another jurisdiction, there will be a deemed disposal by the FIC of its investments at that point – with corporation tax charged on the gains generated. This can be avoided with careful planning.
(b) The FIC does not provide the expected financial upside
There is a small profits rate of corporation tax of 19%. However, this rate is unavailable to companies owned by five or fewer shareholders and instead, these companies will pay tax at the 25% rate, regardless of the profits they generate. There are also compliance costs to consider. The numbers need to be run before the arrangement is created.
(c) Shareholders expecting a greater economic benefit than is intended
Managing family members’ expectations effectively at the outset of an FIC’s creation and during its continuance is very important to avoid misunderstandings and (sometimes significant) disappointment. Understanding at the outset how to manage these expectations (and then doing it) is key.
(d) Information being publicly available when this could be avoided
UK incorporated companies are required to file financial and ownership information at Companies House which is publicly available. Privacy can be enhanced in a number of ways, and this is often very important in a family context.
(e) Tax complications
There are unattractive tax consequences that can arise if the FIC is not structured and funded correctly. One example is that the company will (if not structured correctly) be taxed as a settlement (i.e. a “trust”) with the result that all income and gains arising to the FIC are taxed on the person creating it – and so defeating a principal objective of the planning…
FICs can prove a valuable part of your estate planning. However, you should consider carefully when creating them how they will be managed in practice and how they will adapt to the evolving circumstances of family shareholders.
Please contact Jonathan Riley, Partner, for any queries.
