Family Investment Companies
The term ‘Family Investment Company’ provides connotations of a special type of company.
Actually, it’s just a normal company which is owned by different family members with the purpose of investing (rather than a trade).
It can invest in anything which is legal, but typically that will be property (commercial, residential or holiday lets) and stocks, shares, and equity funds etc.
Companies tend to be taxed at lower rates than individuals who have already used up their basic rate bands of income tax through their normal earnings.
That is why companies are utilised as vehicles for investment, because any investment gains/profits/interest are taxed at relatively low rates, meaning that there is more cash to reinvest (their investments roll-up quicker than individuals’).
Two further key tax points around FICS are:
- Shares in a FIC will always be subject to IHT on death (which might not be the case for a trading company). Therefore, consideration around their shareholding is a vital part of the establishment and ongoing management of a FIC
- Taking money out of the FIC for personal expenditure is likely to create further tax, so this needs to be managed
Shares in companies have three elements to their rights: –
- Voting Power
- Rights to dividends
- Rights to capital on a sale or winding up
Shares issued to individual family members can have have differing rights. For example, a more senior member of the family may require voting rights (to provide the company with direction) but they may not need capital because they wish for the value in the equity to pass down to further generations. Furthermore, if the shares in a senior family member do not have rights to capital then these shares have less value than full shares and so harbour a smaller IHT exposure.
So the conundrum here is to establish the shareholding of the company in a way that allows IHT mitigation but also the possibility of income. It should also be borne in mind that an individual may be due a wage for services they provide to the company, and in such a case they may not need a right to dividend.
A key trap to avoid is capital gains tax. If equity with material value is passed down the generations then this can create a CGT exposure.
Family Investment Companies often develop after money in a trading company is used to buy property and then the trade dies down or ceases. In these cases, thought should be given as soon as possible to the shareholding structure and how equity / rights can be passed down to younger generations.
If a family decides to become involved with property investment for the long term, then a company often tends to be the most appropriate vehicle, with the company borrowing from the family members or a bank to make the acquisitions. In such cases a detailed consideration of the shareholding and what interests can be held by younger generations will be important from the start.
Those involved with stock and shares could also use a FIC but because of the availability of pensions and ISAs their usage in such situations is less common. If a portfolio already exists then resources could be lent to a FIC to start its investment activity but this will require careful consideration.