The rise of Family Investment companies

In the United Kingdom, a Family Investment Company (FIC) is a private company which is typically owned by an individual’s family members. Often, a FIC will be set up by a family’s elders where shares will be allotted to various family members and family trusts. Like a trust, a FIC is set up to protect a family’s assets through time and ensure that wealth is maintained for future generations.

FICs can be set up as private limited companies where the shareholders can benefit from the shield of limited liability, or as private unlimited companies in instances where shareholders require an extra level of privacy and do not want to provide Companies House with publicly available annual accounts.

Why have FICs become popular?

FICs have been on the rise this century due to changes to trust law which occurred in 2006. Prior to this, trusts were seen as one of the most popular options to protect generational wealth. However, the changes ensured that most lifetime transfers into trusts were subject to immediate inheritance tax (IHT) of 20% on any amount over the transferor’s nil rate band. Alternatively, an older family member could make a potentially exempt transfer directly to a child or grandchild; however, that transfer could be subject to IHT depending on whether the transferor passed away within seven years following the transfer.

The benefit of an FIC is that, as a private company, it is not subject to IHT and instead is subject to corporation tax. However, the value of shares held by a particular family member may still be included in their estate for IHT purposes. You should always take tax advice from an appropriately qualified professional before transferring any business or other assets into an FIC.

How are FICs set up and managed?

Firstly, you will need to determine whether the FIC should be set up as a private limited or private unlimited company. This FIC entity can then be registered at Companies House. Initial subscriber shares can be issued at a nominal value to family members.

One of the key differentiators between a typical private limited company and a FIC comes down to the separation of powers between those who are positioned to manage the FIC’s investments and those who will ultimately benefit from a FIC by way of dividends or an eventual return on capital for the sale of their shares.

The FIC’s articles of association (Articles) will be drafted in a way to ensure that the rights attached to the specific shares reflect whether a shareholder will control (much like a trustee) or benefit from (much like a beneficiary) the FIC. This allows for a small group of people to manage the FIC, usually the senior members of the family who will often hold ‘freezer’ shares with a capped capital entitlement. Other family members (often younger people with no involvement in the management of the FIC) will sit in the background and benefit from dividends and their shares’ increased value.

Thinking about setting up a FIC?

If you are considering setting up a FIC, we recommend that you seek specialist advice. Please get in touch with our Corporate Team on 0113 207 0000.