Family Investment Companies: Rising Popularity Amid Business Property Relief Changes

Family Investment Companies (FICs) are gaining traction as a preferred vehicle for wealth management, particularly in light of recent changes to business property relief (BPR).

Why are FICs becoming more popular?

Under current rules, business owners can transfer their trading shares into a trust, pre-liquidity event, without triggering any immediate Inheritance Tax (IHT). The trust wrapper provides asset protection and control, while also allowing intergenerational inheritance tax and wealth planning.

Subject to any U-turn from the government, BPR shares (which currently qualify for 100% relief from IHT) will be limited to only 50% relief over and above the first £1m. As a result, business owners who enter a sale or other liquidity event during their lifetime will likely find themselves with a significant level of cash without a means of tax efficiently gifting that, other than by passing down the wealth outright which is often undesirable for reasons of age, financial maturity, interested spouses or otherwise.

These proposed changes to BPR relief have prompted many families to consider FICs as a compelling alternative to the traditional trust (or as a vehicle from which a trust can benefit) for intergenerational wealth transfer. A FIC structure can be particularly attractive to a business owner or otherwise corporate savvy client given their familiarity with the structure and corporate governance and the appeal of maintaining control over their wealth at board level, while still effecting IHT planning either at purely growth or both growth and capital level with an entirely bespoke shareholder model designed to fulfil the relevant family’s needs.

What are FICs?

FICs are either a limited or unlimited liability company (at the founder’s preference; with the latter providing privacy with potentially low risk) established to hold investments for the benefit of family members, the shareholders. The structure of a FIC is defined by its articles of association and, where relevant, shareholders’ agreement, which outline the distribution of voting or veto rights, dividends, and capital among the family, which may include a trust to cater for future unborn generations. The FIC’s founder typically acts as a director and may have a shareholder role depending on various factors including how control is built into the articles and any financial interest the founder wishes to retain in the FIC. Typically, FICs are funded by share subscription or loan in the first instance, with the potential to gift those benefits down the line if appropriate. Where shares are issued to family members or trusts, the growth attributable to those are removed from the founders’ estate.

Why should HNW individuals consider a FIC and are there any downsides?

The key benefits of a FIC are that they allow the founder to retain control over the company’s assets through the governance structure but with bespoke articles of association and shareholders’ agreement tailored to the founder’s family’s needs and circumstances. No two FICs will necessarily be the same and a thorough consideration of the current and future potential needs and circumstances of the family or intentions for the FIC should be considered at the time of incorporation to ensure tax efficiency. Different classes of shares will be issued to different family members, allowing for a structured approach to income, capital and other rights.

For individuals familiar with corporate structures and governance, FICs offer a less daunting alternative to traditional trusts. The corporate framework of a FIC is often more intuitive for those accustomed to business operations, providing a clear and structured approach to wealth management which is familiar to them and which they can share with their family. The exercise needs to be taken seriously. It is wider than just the founder - introducing shareholdings for family members means it is crucial that they understand the role and benefits of the FIC and that they think carefully about their own succession planning and Wills, mindful of any transfer restrictions in the articles and the long-term family’s aim for the FIC.

There is no tax “magic” to FICs. They are companies and taxed as such under usual principles. They are therefore long-term vehicles given the potential for double taxation (at corporate level on the investments and then at shareholder level on a distribution).  Accordingly they should be looked at as investment vehicles under which capital growth can roll up. That said, for the time being, the government’s commitment to capping corporation tax at 25% for the life of parliament and the increase of capital gains tax to 24% has made FICs more attractive. They will be of most benefit to HNW individuals looking to invest substantial sums for the future of their families, but where outright gifts are undesirable.

For individuals considering a FIC, investing the time in planning the FIC structure and intentions for the FIC is fundamental.  It can be very costly in tax terms to amend a FIC after it has been funded and therefore finding the right structure for your family and taking tax, legal and investment advice is crucial. With the right advice and forethought, FICs can prove a valuable succession planning vehicle for families with significant wealth to provide for generations to come.