In this, the second piece in our ongoing, educational Family Investment Companies (FICs) campaign, our experts have answered five of the most important FICs Qs.
In the right circumstances, FICs can be a flexible, secure, tax-efficient way to pass on your family wealth. If you’d like a recap on what FICs are and their benefits, we covered all that and more in The ABCs of FICs – a collaborative piece created alongside CP’s Tax and Law teams.
Now, without further ado, let’s get into the questions.
Q: What are my options when setting up a FIC?
A: A FIC can either be incorporated as a new company or an existing company can be converted into a FIC. If you’re incorporating from scratch, the company will be set up by completing the incorporation requirements of Companies House. The FIC would adopt bespoke articles of association, appoint directors and allot shares to the desired shareholders. Following this, any required assets would be transferred into the FIC.
If you’re converting an existing company into a FIC, care will be needed as there is potential for tax liabilities to arise as a result of the alteration.
Alternatively, another method is to create a new class of growth shares in the FIC which would then be entitled to dividends and capital rights to any growth in the FIC. Here, you can preserve the original status of the trading company, which can be attractive for due diligence purposes, employee shares schemes etc.
Either way, the FIC will be governed by the regulations of the Companies Act 2006 and it will be treated the same as any other company in the UK.
Q: Who will have control over the FIC?
A: To a certain extent, this is up to you. The articles of the company will be drafted in a bespoke way to ensure the appropriate people make key decisions.
Companies are usually controlled by directors on a day-to-day basis, with shareholders’ consent required in commercial arrangements. It’s possible to apply this method, with shareholders holding the key voting rights or, alternatively, the directors can be given all the powers required to vote.
Family members can also hold shares in the FIC which don’t have voting rights, and they can still receive dividend payments in relation to their shareholding if desired. In addition, asset protection provisions can be included which can state that only bloodline family members may become shareholders, and appropriate share transfer restrictions may also be incorporated.
Q: What are the tax implications of gifting FIC shares?
A: The gift could be subject to inheritance tax (IHT) on a person’s death, calculated on the value of the shares at the date of the gift. If they are left by will and the individual’s nil rate band is surpassed, they will be subject to 40% IHT on their market value.
Lifetime gifts of shares will be subject to CGT at 10% or 20% depending on the individual’s income tax band, so long as the shares have increased in value since they were acquired.
A share valuation is needed to ensure that any shares that are allotted or transferred don’t have an immediate tax charge and that the 7-year window for a value transfer is considered and planned for effectively. If growth shares are used correctly, family members may receive dividend payments and there will be no immediate tax charge to IHT or a charge upon death.
Q: What will happen to the assets if my child experiences bankruptcy, divorce or undue influence?
A: The articles of the FIC will be drafted in a way that includes provisions restricting the identity of the shareholders, for example to bloodline descendants.
Additionally, they can be drafted to include provisions that require a compulsory transfer of the shares on certain events, for instance if a shareholder is made bankrupt, providing further protection to the remaining shareholders of the FIC.
Q: How does a FIC differ from a discretionary trust?
A: Discretionary trusts are generally more suitable for smaller funds and holding assets that beneficiaries may continue to use. FICs may be appropriate for holding large sums of capital over the long term and producing income for shareholders.
However, it’s common to allow some shares in the FIC to be held by a discretionary trust for future generations, thus combining the benefits of both. In addition, a trust will pay higher rates of tax when compared with a FIC, which will pay a maximum of 25% corporation tax.
Managing a trust or a FIC usually requires ongoing specialist advice and there are costs that are associated with that.
ANY QS OF YOUR OWN?
Establishing and operating a FIC can get complex, but our Wealth, Law and Tax teams can help you make sure all bases are covered.
So, if you’d like to find out more about FICs and whether they’re suitable for your family’s situation, let us know.
We recommend that appropriate advice be sought if you’re considering setting up a FIC. FICs aren’t suitable in all situations and alternative options may provide a better solution.
Investment into any portfolio should be regarded as for the medium to long-term. Past performance is no guarantee of future returns and the value of investments and the income from them are not guaranteed and can fall as well as rise. The returns from your portfolio will fluctuate over time. On encashment of your investment, you may not get back the full amount invested and could lose part or all of your capital. There are no guarantees that your portfolio will achieve the returns you need to meet your goals. Changes in exchange rates could affect the value of overseas investments and the effect of inflation could reduce the future purchasing power of your investments.
This information is based on current UK tax law and will be affected by changes in law and your residency/domicile status. A Family Investment Company is not regulated by the Financial Conduct Authority. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.
