What is a Family Investment Company?
A Family Investment Company (FIC) is a company that holds investments for a family and is tailored to that family’s requirements. It has become an alternative structure to a discretionary trust, albeit that an FIC and a discretionary trust can also work well when used together for investing as well as holding assets that are used by a trust’s beneficiaries.
Does it have to be incorporated in England and Wales?
An FIC can be incorporated offshore. If it is managed and controlled by people who are resident in the UK, however, then it will still be subject to UK corporation tax.
In England and Wales, an FIC is often set up as an unlimited company to maintain privacy. Limited companies cap a shareholder’s liability. Except for smaller limited companies with a lower revenue, limited companies are required to file accounts with Companies House and that financial information is then in the public domain. Regardless of whether a company is unlimited or limited, the names of its directors, shareholders and any person with significant control must be disclosed to Companies House.
How does it work?
An FIC is incorporated by any founders, who are often one generation of a family. The founders transfer assets or cash to the company as a gift and to be held as its capital. Multiple classes of shares are created with each class able to have its own rights to receive capital and income distributions. Shares are issued to the founders and other family members.
Does a founder retain ownership and control?
The founders transfer assets or cash to the FIC and in doing so give away their ownership of those assets or cash.
The founders are appointed as directors of the FIC. They control investment strategy and the declaration of any dividends. Their shares are likely to have voting rights but no rights to receive any capital or income distributions.
Any child or grandchild is usually granted shares without any voting rights but with rights to receive capital and income distributions. At the appropriate time, they may also be appointed as directors to ensure the transfer of control from one generation to the next. This is achieved by careful drafting of the FIC’s articles of association and a shareholders’ agreement.
Are there tax advantages?
An FIC offers a way of maintaining and accumulating wealth tax efficiently. It reduces the amount of inheritance tax payable if its founders survive for seven years after having transferred assets or cash to the FIC. Unlike a trust, it is not subject to initial and periodic tax charges. The precise tax advantages of an FIC compared to a trust or another structure will depend on each family’s specific situation.
Are there any other advantages?
An FIC can mitigate the risk of dissipation of family wealth caused by factors such as relationship breakdowns and unwise investment decisions. It provides a way of controlling who can inherit and enjoy wealth such as through the compulsory transfer of shares if a family member does not comply with family rules set out in a Family Charter or on other specified events.