Helen Cox and Melissa Lesson of private client lawyers at Mishcon de Reya explain why Family Investment Companies are becoming an increasingly popular alternative to trusts in wealth and succession planning.
This guide explains the key features of FICs and how High Net Worth Individuals might look to use them to mitigate Inheritance Tax and protect family wealth from divorce.
It is often said that the easiest way to avoid inheritance tax (IHT) is to give away your wealth more than 7 years before death. In reality, this simplistic approach to succession planning is hard to follow – you may have plans for managing and investing your assets that you wish to see to fruition; or if you are ready to pass your assets to the next generation, they may not be ready to manage those assets themselves.
Traditionally, trusts have played a key role in wealth and succession planning. Unfortunately, in most cases IHT is payable when UK assets are settled into a trust and trusts are generally subject to periodic IHT charges. As a result, family investment companies (FICs) have become a popular alternative.
FICs are private limited companies specifically incorporated for the purpose of wealth and succession planning
What is a FIC?
FICs are private limited companies specifically incorporated for the purpose of wealth and succession planning. The key advantage of a FIC is that it allows the “founder” of the FIC to pass their wealth to the next generation whilst retaining a significant level of control.
The founder(s) of a FIC may be a sole individual, a married couple/civil partners or two or more senior family members. The shareholders of the FIC will be the founders and the children/junior family members who are to inherit the founders’ assets.
How is a FIC structured?
A FIC will usually issue several classes of shares. Shares issued to junior family members will carry a right to receive dividends and assets of the FIC, but may not carry any voting rights. In contrast, the founders’ shares usually carry limited, or nil, rights to dividends and assets, but full voting rights. If structured correctly, the founders’ shares should hold little or no economic value, meaning nominal IHT is payable on death.
As with any other limited company, a FIC is managed and controlled by its directors. This enables the founders to manage and control the company and its investments by taking the role of directors of the company. It also means that, in future years, junior family members can take on responsibility for managing the FIC’s investments, either by being appointed as an additional director or by eventually replacing a founder as a director when the time is right.
Once a FIC has been established, the founders will transfer assets to the FIC.
As with any other limited company, a FIC is managed and controlled by its directors. This enables the founders to manage and control the company and its investments by taking the role of directors of the company
Which assets can be held by a FIC?
A FIC can own any assets, including cash, property or shares. The founders may transfer a lump sum of cash to the FIC which is then invested by the FIC. Alternatively, rental properties or share portfolios may be transferred over. Once transferred, these assets are owned by the FIC and should no longer form part of the founders’ estates for IHT purposes (provided the founder does not reserve a benefit in the assets). Transferring assets other than cash may give rise to a tax charge and advice should be sought as to which assets can be transferred tax-efficiently.
What happens to a FIC on divorce?
Restrictions on share transfers can be included in a shareholders’ agreement to ensure that the shares are not transferred outside of the family without the consent of the controlling family members. Family members can also enter into a legally binding shareholders’ agreement, which can be used as a private document to cover discrete matters relating to the ownership of the FIC or of any of its assets.
The reality is that for the vast majority, trusts have not proved to be “bomb-proof” in the event of a divorce
Historically, many have placed their assets in trust structures with the belief that in the event of a divorce (either of the Settlor or a beneficiary), the assets contained within the Trust would remain protected by virtue of the structure itself and/or the fact that it would generally be held offshore. The reality is that for the vast majority, trusts have not proved to be “bomb-proof” in the event of a divorce. Whilst the location of the trust can and has created difficulties (some jurisdictions are less cooperative than others) in terms of disclosure and enforcement, the Court will consider the assets contained in the trust, regardless of the location. The Court will also examine how the trust has operated during the marriage (for instance as a source of income, capital and or housing) and whether or not the spouse making the financial claim has ever been a beneficiary.
The difference with an FIC in these circumstances is the control element. The founders, in creating the FIC, are relinquishing control over any income or right to the capital of assets within it. As such in the event of the divorce of a founder, whilst the FIC would of course need to be disclosed, if the assets are no longer under the control of and cannot be extricated by the founder (and assuming the FIC was not established immediately prior to and in contemplation of a divorce), the Court would be in difficulties making any adverse findings that the FIC is an asset or income stream available to the founder. The caveat to this is that it pre-supposes that the junior members are not and have not chosen to utilise their right to income or capital in a way that financially supports the founder, such as paying them an income, providing housing or such like. Such use could also prejudice the founder’s inheritance tax position.
Setting up a FIC
Before setting up a FIC, it is important to seek advice to ensure that a FIC structure is the right choice in your individual circumstances. You should also bear in mind that there are certain administrative and reporting requirements under UK law, just as with any other limited company.
Family Investment Companies offer several wealth planning benefits, but are a complex area that calls for specific advice. To start the process of finding the right adviser for your needs, let our smart online tool filter the market to find your best-matched firms. Alternatively, if you would like to discuss your particular wealth management needs with the findaWEALTHMANAGER.com team, click HERE.