The family investment company (FIC) model has grown in popularity for people considering tax and estate planning since the 2006 change in the way that trusts are taxed. Despite this change and the subsequent growth in popularity of the FIC, a company model for holding family wealth and controlling how it passes through the generations has always been fairly popular, not least because so many people understand companies – whereas trusts remain an abstract (and almost mythic) concept for most people.
A FIC is a company almost identical to any other, but created with constitutional documents (particularly the Articles of Association and Shareholder Agreements) which seek to ensure that the FIC assets stay within the company structure for the benefit of the family, and the FIC shares cannot pass away from family and their direct lineal descendants.
It is important to note that, save perhaps for the advantages of corporation tax being at a lower rate than income tax and (as is expected in future) capital gains tax, planning opportunities are around what is done with the FIC rather than the mere existence of the structure.
Should someone conducting their planning put wealth into a company structure and in return own shares then they are in the same inheritance tax position as before, whereas someone giving money into a trust (for example) will have that wealth out of their estate after seven years.
A FIC is a model worthy of consideration for anyone planning how they are going to protect wealth for their family. We know from case law that if a company is established for legitimate purposes and run like a proper company, then if the constitution of the company dictates that shares cannot pass out of the family then on divorce the Courts will tend not to deviate from that. As such, if parents are concerned about wealth being lost because of their children or further descendants getting divorced, then this is one way of protecting the family wealth that they have built up.
Of course, someone getting divorced who owns FIC shares may have to find a way of compensating their ex-spouse through other wealth, however, this at least protects the assets put into the FIC. It can have a similarly powerful effect in situations where a descendent becomes bankrupt or a descendent dies leaving their wealth outside the family.
Inheritance tax planning may be achieved through issuing shares carrying particular rights (such as to dividends or capital growth) and so reducing the value of the shares taken by those people establishing the FIC. Further inheritance tax planning can be carried out simply by giving shares away.
It should be noted that it is very unusual for shares in a FIC to qualify for business property relief for inheritance tax. This is perhaps unsurprising given that this is by nature an investment company.
In conclusion, a FIC should not be seen as a magic bullet for people who are concerned about tax and estate planning, but for many people it is something that is worthy of consideration.
It is generally true that people who need to plan around relatively small amounts of money may wish to avoid this particular planning model due to the costs of creating it and the compliance that goes along with it, however for clients who are thinking about planning with (for example) £1m or more and who wish to retain significant control of that wealth both on a day to basis and guiding what happens in the future, it is an attractive concept to consider alongside other forms of planning.
If you would like more information, please contact James Hall at Anthony Collins Solicitors on 0121 212 7416 / email: [email protected].