What is a family investment company?

Limited companies are a useful and flexible structure for holding investment assets, and are often used by families to pass on wealth to younger generations.

So, what is a Family Investment Company (FIC)? You might see this term used in the press, but it’s essentially a limited company that is being used to hold a family’s investments.

Limited companies are able to hold all different types of assets, from cash deposits, to portfolios of residential and/or commercial properties, to stocks and shares and other investments.

They also offer the ability for some shareholders to hold shares which give them voting power over the direction of the company, while other shareholders might hold different classes of shares which own part of the underlying value of the company, but without any power over the company’s day to day activities.

They are commonplace in Inheritance Tax planning for wealthy families, as they offer the ability to pass a share of the underlying assets to the next generation, which means they eventually move out of your estate for Inheritance Tax purposes, but while you still have control.

An FIC is an alternative to a Trust, and we find that many clients prefer the idea of an FIC as they can still derive some income from the underlying assets, while the underlying capital can start to be transferred to their children. In contrast, if they instead gift assets into a trust, then that tends to provide capital and income for the trust beneficiaries only.

Many clients considering an FIC have already run companies and are therefore more familiar with the limited company structure, as opposed to a trust, and they prefer the flexibility it offers.

However, there are downsides to an FIC compared to a trust, the main one being that it is harder to protect the underlying assets from events such as one of the children getting divorced. With a trust, the trustees have the power to direct assets, and no one beneficiary can lay claim to them, whereas with a limited company, they would own a definable share.

In some respects, if you intend to set up an FIC and then gift a definable share to your children/grandchildren, then it might just be easier to make an outright gift instead, which is then a lot less complex, and avoids the ongoing costs of operating an FIC. Although, by doing so, you would then also be relinquishing control of the underlying asset being gifted, whereas with an FIC you can maintain day to day control of the underlying assets, which therefore offers a level of protection.

A further consideration many overlook when setting up an FIC, is how the next generation would run the company once they take over day to day control. Will your children all be able to agree on how the company is run? In contrast, a trust can appoint separate trustees to oversee its operation, which can often be preferable. In theory the same could happen with an FIC, as voting shares could be held by the same people that you would have named as trustees in a trust, but this is less commonplace with an FIC.

Inheritance Tax planning must also be considered. If the majority of your assets are held in an FIC and you retain some shares and ownership, then those shares will be subject to Inheritance Tax upon death, as most FIC’s will not qualify for Business Property Relief, as they are not trading. This may force the sale of some of the underlying assets held in the FIC, plus further tax on the extraction of those funds from the FIC, to enable your estate to settle the Inheritance Tax. We therefore tend to advise FIC’s as being one part of overall estate planning, while retaining sufficient cash and other assets to enable future Inheritance Taxes to be funded, wherever possible.

In summary, FIC’s offer a flexible and familiar structure for holding investments that you intend to pass on to future generations, but should be considered alongside trusts and other planning measures, in most cases, especially if you want the underlying assets to pass on to multiple generations.