In our previous IHT planning guides, our in-house and guest experts have discussed a range of tools – from writing life insurance in trust to buying woodland – to help you better understand how you might mitigate or eliminate an IHT liability. In this succession planning guide, Nicholas Toubkin, our Senior Client Director, introduces us to the lesser known Family Investment Company (FIC) and why it might – or might not – be suitable for you.
What is a Family Investment Company?
“A Family Investment Company (FIC) is a flexible tool that can be used to transfer wealth to the next generation – or future generations – while still allowing you to retain control of your assets,” Nicholas explains.
“It is a private company, and parents can retain controlling rights over the company, choose when dividends are paid and to whom, and where the funds are invested but despite its name, the FIC is not just restricted to family members,” he reveals. “The extent of the relationship between you and your beneficiaries does not matter – it can be a great inheritance tax (IHT) planning tool for people who do not have children.”
How does a FIC for IHT planning work?
To mitigate or eliminate an IHT liability, a FIC must be structured correctly. Seeking professional legal and financial advice prior to its set up is crucial.
Post set-up, any growth in the value of the shares owned by your beneficiaries is outside of your estate for IHT purposes, if the funding of the company comes by way of a loan..
Transferring money into the company: a gift or a loan?
“If you gift the money into the FIC, you start the 7 year rule,” Nicholas comments. “The alternative is that you make a loan into the company. This is less effective initially because the loan is still in your estate, but over the long-term, the growth is outside of your estate,” he points out. “For example, if you put £5 million into the company and survive for a further 20 years, its value might have grown to £10 million. While £5 million is still in your estate, the £5 million growth is not.”
If you choose to transfer assets via a loan, some – or all of it – can be recalled as and when you need. There is no IHT chargeable on this. It is worth noting, however, that if you pass away before the loan is repaid to you, it will remain within your estate for IHT purposes. Gains realised on transfer may also result in a Capital Gains Tax (CGT) liability.
The 6 main benefits of a FIC
The FIC is a highly effective tool for succession planning; it also offers a number of other benefits.
- It falls within the UK corporation tax regime
- Management and business expenses are tax deductible
- Loans can be recalled
- Steps can be taken to protect your assets
- It does not have to be limited
- Its company structure is relatively straightforward
While your beneficiaries – as shareholders – will have to pay tax on the profits that they take from the FIC, they will (depending on their circumstances) benefit from the annual dividend allowance and potentially also the personal income tax allowance.
3 drawbacks of using a FIC
While the FIC boasts a number of advantages and is an effective way to mitigate or eliminate IHT, there are also disadvantages to consider.
- Set up and ongoing costs can be substantial
- When used for family members, it may be less tax efficient
- Laws can – and do – change
Is a FIC right for you?
As Nicholas points out, the FIC is one of many tools that can be used for succession planning.
He advises against using it in isolation and as part of a broader wealth planning strategy.
“A FIC is most efficient when it is used as a long-term solution; this should not be money that you put in one day and take out the next.”
To determine whether a FIC is right for you, we recommend requesting personalised, professional advice from legal and financial experts.
Ready to take steps to protect your loved ones from a costly IHT liability?
Our team of independent advisers are highly experienced in IHT planning and regularly advise high net worth and ultra-high net worth individuals, fiduciaries, and family offices on the use of FICs to mitigate or eliminate an IHT liability. For advice that is tailored to you and your unique situation, contact our London or Nice office and book an appointment with one of our advisers.
