Worried about your family's inheritance? Explore the benefits of a Family Investment Company.

Roles Within a Family Investment Company

Understanding the different roles within an FIC is key to grasping how they function:

1. Shareholders:

Usually family members who own shares in the company. Their level of control and benefit depends on their share class. Shareholders have several key rights and responsibilities:

• Voting on major company decisions at shareholder meetings
• Receiving dividends (if their share class allows)
• The right to see company accounts and other documents
• Potential liability limited to the amount unpaid on shares they hold

2. Directors:

Responsible for running the company. Often, the founders (e.g., parents) start as directors, with children potentially joining the board over time. Directors have significant responsibilities:

• Setting the company’s strategy
• Making day-to-day management decisions
• Ensuring the company complies with relevant laws and regulations
• Managing the company’s assets and investments
• Deciding on dividend payments (subject to shareholder approval)
• Directors have legal duties under the Companies Act 2006, including:
  • Duty to act within powers
  • Duty to promote the success of the company
  • Duty to exercise independent judgment
  • Duty to exercise reasonable care, skill and diligence
  • Duty to avoid conflicts of interest
  • Duty not to accept benefits from third parties
  • Duty to declare interest in proposed transaction or arrangement

4. Beneficiaries:

While not a formal role, beneficiaries are those who stand to benefit from the FIC, typically younger generations of the family. They might benefit in several ways:

• Receiving dividends from shares they own
• Benefiting from the growth in value of their shares
• Potentially receiving salaries if they work for the FIC
• Receiving loans from the FIC (subject to strict rules to avoid tax pitfalls)

Let’s consider a more detailed hypothetical scenario to illustrate these roles:

The Johnson family sets up an FIC. Mr. and Mrs. Johnson are the initial directors and hold 10,000 Class A shares each, with full voting rights but no dividend rights. Their three children each receive 5,000 Class B shares, which come with dividend rights but only 10% voting power each. Additionally, 15,000 Class C ‘growth’ shares are created, which only benefit from increases in the company’s value above £10 million.

Initially, Mr. and Mrs. Johnson make all management decisions as directors. They decide to pay a modest dividend on the Class B shares each year, providing some income for their children. As the children grow older and become more involved in family wealth management, the eldest child, Sarah, is appointed as a director at age 30. She starts to take on more responsibility in running the FIC, including helping to manage its property portfolio.

Five years later, the FIC has grown significantly in value. The Class C shares, initially worth very little, are now valuable. Mr. and Mrs. Johnson gift 1,000 Class C shares each to their five grandchildren, held in bare trusts until they reach 18. This allows the grandchildren to benefit from future growth without giving them immediate access to funds or any control over the company.

This scenario illustrates how an FIC can be used to gradually transfer wealth and responsibility across generations while maintaining overall control.

Managing Assets Within the FIC

Once established, the FIC becomes a vehicle for holding and managing family assets. This process involves several key aspects:

1. Asset Transfer:

The founders transfer assets into the company. This could include:

• Cash: Straightforward to transfer, often done as a combination of share capital and loans.
• Investments: Portfolios of stocks and bonds can be transferred in-specie (without selling).
• Property: Both residential and commercial properties can be transferred, though this may trigger Stamp Duty Land Tax (SDLT).
• Business interests: Shares in private companies or business assets can be transferred.

For example:The Wilson family transfers £5 million in assets to their new FIC. This includes £1 million in cash (used to subscribe for shares), a £2 million stock portfolio (transferred in-specie), and a £2 million commercial property (triggering SDLT, but structured to minimize the tax impact).

2. Investment Strategy:

The directors decide on the investment strategy. This might involve:

• Setting asset allocation targets (e.g., 60% equities, 30% bonds, 10% property)
• Deciding on risk tolerance and investment horizons
• Choosing between active and passive investment approaches
• Considering ethical or sustainable investment criteria
• Regular review and rebalancing of the portfolio

A typical strategy might look like this:

The Brown FIC adopts a balanced growth strategy. 50% of assets are invested in a diversified global equity portfolio, 30% in government and corporate bonds, 15% in UK commercial property, and 5% held as cash for opportunities. The directors review this allocation quarterly and rebalance annually.

4. Growth and Reinvestment:

Any income or capital gains generated within the FIC are subject to corporation tax (currently 19%, rising to 25% for profits over £250,000 from April 2023). The post-tax profits can be reinvested to grow the company’s value. This might involve:

• Reinvesting dividends from equity investments
• Using rental income from properties to purchase additional assets
• Capitalizing interest on cash holdings
• Undertaking development projects to increase property values

6. Distributions:

Profits can be distributed to shareholders as dividends, subject to the rights of their share class. This provides a mechanism for providing financial benefit to family members. The process typically involves:

• Directors proposing a dividend based on available profits
• Shareholders voting to approve the dividend
• Dividends paid according to shareholdings and share class rights

7. For example:The Taylor FIC generates £500,000 in profit after corporation tax. The directors propose, and shareholders approve, a dividend of £200,000. This is distributed to holders of Class B shares (the children), providing them with income. The remaining £300,000 is reinvested to grow the company’s asset base.

Tax Considerations

While we’ll dive deeper into tax implications in another section, it’s worth noting some key points:

• Corporation Tax: Profits within the FIC are subject to corporation tax, which is generally lower than higher-rate income tax. From April 2023, the main rate will be 25% for profits over £250,000, with a small profits rate of 19% for profits up to £50,000.
• Inheritance Tax (IHT): The value of the shares at the time of transfer into the FIC is potentially subject to IHT, but any future growth in value can be outside the founder’s estate. This can result in significant IHT savings. For example:The Davies family transfers £5 million of assets into their FIC. Over the next 10 years, these assets grow to £8 million. The £3 million growth is outside of Mr. and Mrs. Davies’ estate for IHT purposes, potentially saving £1.2 million in IHT (at the 40% rate).
• Capital Gains Tax (CGT): Transferring assets into the FIC might trigger a CGT event, but there are often reliefs available. For instance, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) might apply when transferring shares in a trading company.
• Stamp Duty Land Tax (SDLT): Transferring property into an FIC will typically incur SDLT, although reliefs may be available in some circumstances.

Flexibility and Control

One of the key advantages of an FIC is the level of control it offers:

1. Tailored Structure:

The articles of association and share structure can be designed to suit your family’s specific needs and dynamics. This might include:

• Provisions for dealing with family disputes
• Rules about marrying in and divorcing out of the family
• Mechanisms for bringing the next generation into the management of family wealth

2. Gradual Transfer of Wealth:

Through careful share structuring, wealth can be passed to the next generation while the founders retain control. This might involve:

• Gifting non-voting shares to children over time
• Creating ‘freezer’ shares that cap the founders’ exposure to future growth
• Using trusts to hold shares for younger family members

3. Adaptability:

The structure of the FIC can be modified over time as family circumstances change. This might include:

• Changing share classes as children mature and take on more responsibility
• Adjusting the investment strategy as the family’s needs evolve
• Bringing in professional directors as the asset base grows more complex

Consider this expanded example:

The Smith family’s FIC initially has Mr. and Mrs. Smith as sole directors with 1,000 Class A shares (with voting rights but no dividend rights). Their three adult children each receive 200 Class B shares (with dividend rights but no voting rights). As the children reach their 30s and become more financially savvy, they’re each appointed as directors, but Mr. and Mrs. Smith retain majority voting rights through their Class A shares.

Ten years later, as Mr. and Mrs. Smith approach retirement, they decide to transition more control to their children. They convert 300 of their Class A shares to Class B shares, which they then gift equally to their children. This reduces their voting control to 70% while giving the children a greater stake in the company’s profits.

Meanwhile, five grandchildren have been born. The Smiths create a new Class C share, which has no voting rights and only receives dividends once the holder turns 25. They gift 50 Class C shares to each grandchild, held in trust until they reach 18.

This structure allows for a smooth transition of wealth and responsibility over time, while still allowing the founders to maintain overall control of the family wealth.

Potential Challenges

While FICs offer many benefits, it’s important to be aware of potential challenges:

1. Complexity:

FICs can be complex to set up and manage, requiring ongoing professional advice. This includes:

• Regular board meetings and proper corporate governance
• Annual accounts and tax returns
• Ensuring compliance with company law and tax regulations

2. Family Dynamics:

As with any family financial arrangement, FICs can sometimes lead to disagreements or tensions. Potential issues include:

• Disputes over dividend policies
• Disagreements about investment strategies
• Tensions between family members who are directors and those who aren’t
• Challenges when family members divorce or die

3. Regulatory Changes:

Tax laws and regulations can change, potentially affecting the benefits of an FIC. Recent years have seen changes to:

• Dividend tax rates
• Corporation tax rates
• Rules about loans to participators

4. Costs:

There are ongoing costs associated with running a company, including:

• Accounting and audit fees
• Legal fees for ongoing advice and any structural changes
• Potential recruitment costs if professional directors are needed

5. Illiquidity:

Shares in an FIC are typically illiquid – they can’t easily be sold or transferred outside the family. This can cause issues if a family member needs to access capital quickly.

6. Public Information:

As a registered company, certain information about the FIC will be publicly available at Companies House, including director names and abbreviated accounts.

Understanding these mechanics is crucial in deciding whether an FIC is right for your family. At TaxAgility, we’re here to guide you through every step of the process, from initial consideration to setup and ongoing management. Our team can help you navigate these complexities, design a structure that suits your family’s unique needs, and ensure your FIC remains compliant and effective over time.

Why not schedule a consultation to discuss how an FIC could work for your family’s unique situation? We can provide a detailed analysis of how these mechanics would apply in your specific circumstances, helping you make an informed decision about whether an FIC is the right wealth management tool for your family.