What is a Family Investment Company?
One of the things we are seeing here in the corporate team at Gorvins is an increase in the number of Family Investment Companies (also known as an FIC) which are being set up. So, what exactly is a Family Investment Company?
An FIC is essentially a standard limited company but one which is set up in such a way that the older generation will typically have control over the day to day running of the company, but the younger generation will benefit from the capital value and any profits derived from that company.
Why use a Family Investment Company?
The main reason for using a FIC is as part of a tax planning exercise. Usually parents will gift their children the cash for them to put into the FIC which allows the FIC to buy assets (this could be shares in listed companies, bonds, properties etc.) where from a parents’ perspective this can help reduce the size of their estate for inheritance tax purposes (subject to the usual proviso about surviving 7 years after any gift of monies or other assets) and allows the children (and not the parents) to benefit from the capital growth on those assets and any profits that the FIC generates from those assets.
Occasionally parents may transfer assets direct into the FIC so as to effectively “freeze” the value on those assets (this may incur a tax charge – but one some parents are happy to pay so the assets concerned are outside of their estate), but it does mean those assets won’t grow in value in the parents’ estate as the children would then benefit from the future growth. Again, this helps keep the value of the parents’ estate under control.
So how is an FIC set-up?
An FIC is a standard limited company (which can be limited or unlimited – see below) where usually parents would have a particular class of shares (let’s say A shares) where those A Shares have all the voting rights to control the company and to appoint and effectively control the board of directors who would manage the company and the decisions it takes on a day-to-day basis. Usually, the parents would be the directors of the FIC. The A Shares held by the parents would typically have no right to capital or dividends.
Each child would then have their own class of shares (say B Shares and C Shares between 2 children) where these shares would hold all the capital entitlement (normally on a pro-rata basis between the B Shares and C Shares) and the right to a dividend. Usually the Articles of Association (i.e. the company’s constitution) would allow for different dividends to be declared to different shareholders (rather than being paid on a pro-rata basis). This gives flexibility where cash could be paid out to one child (say if they needed a deposit for a house) without necessarily paying it out to the other child at the same time.
Occasionally Discretionary Trusts set up for the benefit of the children may also hold their own class of shares in the FIC (say D Shares and E Shares). Trusts can offer tax efficient wealth transfers and succession planning and offer discretion in distributing income and assets to family members. The use of a trust will likely assist with inheritance tax planning for the future for the benefit of children and unborn family members.
Limited or unlimited?
A standard company limited by shares (known as a “limited company”) is often used for an FIC. This is the same as the vast majority of companies registered at Companies House. These are called “limited companies” as the liability of the shareholders is limited to the price they pay (or are deemed to pay) for their shares, which could be as little as £1, if the company were to become insolvent, providing of course there has been no wrongdoing or illegality.
However, with a company limited by shares, the company is subject to the full filing regime at Companies House which means fling annual accounts showing the value of the assets of your FIC which are then available for everyone to see via the Companies House website.
As a result, some families choose to go down the route of using a different type of company called an “unlimited company with a share capital”. In this type of company, the structure can be set up exactly as above (A Shares with parents, B Shares and C Shares with children etc) but the shareholders have an unlimited liability. As such if an unlimited company became insolvent the shareholders would be legally obligated to meet the shortfall between the company’s assets and the company’s liabilities.
However, this type of company does not need to file accounts with Companies House so details as to its assets remain confidential and outside of the public realm. This type of company would not be suitable or recommended for a traditional trading company but on occasion it may be useful to hold assets where the debts or liabilities will be lower risk and a degree of privacy in relation to family wealth may be required.
Obtaining advice is essential
Setting up an FIC is simply not a case of forming a new company, giving mum and dad some A Shares and the children B Shares and C Shares and then transferring assets or cash into it as doing this without taking proper advice could trigger an immediate tax liability or the structure may not stand up to scrutiny at a later date if is not structured correctly at the outset. As such taking both tax and legal advice from advisors who are experienced in setting up and structuring FICs is essential if you are planning to go down this route.
If you or your Family are looking for advice around setting up an FIC then Gorvins Solicitors would be happy to help. Please contact our Corporate Team on 0161 930 5151, email enquiries@gorvins.com or complete the online contact form below.