In her latest article, Head of Corporate & Commercial Karen Edwards outlines what a family investment company is and how they work…
What is a family investment company?
A family investment company is a company specially incorporated to protect current wealth, and to use this to generate further wealth for future generations.
It is a common investment tool adopted by families for its younger members. More often than not, the shareholders are entirely made up of family members.
It is an attractive option because it provides a way of putting an effective succession plan in place, whilst also mitigating tax.
Is tax payable on family investment companies?
Family investment companies can provide various tax advantages, particularly in relation to inheritance tax.
By way of brief example, a gift of shares in the company to family members could be an exempt transfer for inheritance tax purposes if the donor subsequently survives for seven years. Equally, by making the gift in the company’s infancy, there would be no capital gains tax for the donor.
It is worth noting however that stamp duty land tax or capital gains tax liabilities may arise where non-cash assets, such as property, are transferred into the company.
We are unable to provide any specific tax advice and would strongly recommend that anyone contemplating a family investment company speaks to a tax adviser. Tax planning both at the outset and on an ongoing basis, is vital. This article focusses on some practical and legal aspects to consider.
What are the advantages, or disadvantages, of a family investment company?
Family investment companies can be a way of ensuring that specific assets stay within the family. They can also be a way of ringfencing certain assets so that these are protected in the event of, say, divorce proceedings.
However, they are unlikely to be as effective for those families wishing to receive a regular return, due to the longer-term nature of any investments. With any family structure, there could also be a risk that family conflict hinders the operation of the company, so careful consideration should be had to the practical aspects of setting this type of company up beforehand.
Are family investment companies regulated?
Family investment companies are not subject to any special rules of their own and are no more regulated by Companies House than a standard limited company. Depending on whether you set the family investment company up as a limited company or an unlimited company, the obligations as far as what are required by Companies House are, for the most part, the same as any other company.
Should a family investment company be limited or unlimited?
A family investment company can be either. Many opt for the company to be unlimited as unlimited companies are not required to file accounts with Companies House. This adds a layer of privacy, particularly where the company is holding substantial assets.
However, an unlimited company does not offer limited liability to its shareholders so in the event of the company’s insolvency, the shareholders would be personally liable for any debt of the company. Given the purpose of the company is to hold investments and that the risk of any personal liability could therefore be low, it is worth considering.
How do I set up a family investment company in the UK?
Before incorporating the company at Companies House (either as a limited or unlimited company), you should decide who will be the directors and shareholders.
It is usually the case that the founders of the family investment company will be appointed as the directors of the company, so that they can keep control of the day-to-day management and decision making. Any rules governing the appointment or removal of directors should be set out in the articles of association.
What shares will I have in a family investment company?
Each shareholder will hold different classes of shares, which all have varying rights in respect of voting, dividends and capital distribution.
Usually, those intended to benefit from the growth of the company will hold what is known as ‘growth shares’, which attract the right to share in any winding up or sale of the company, hence benefiting from any financial growth of the company. The growth shares will usually be held in a trust, for tax purposes.
Conversely, whilst the founders will not hold shares which attract any capital rights, they will likely hold the majority, if not all, of the voting rights so that again, they have control over ensuring maximum growth.
Is a family investment company usually a trading company?
No, family investment companies do not usually carry out any trading activities, but rather they hold assets and investments which generate income. These will often be made up of property, gifts or interest-free loans.
What else should I consider with a family investment company?
The articles of association are a key document for any family investment company and should be appropriately drafted in readiness for the company’s incorporation. These will set out how the company is to be managed, from directorships to share class rights. They can also cover issues such as what should happen if a shareholder wishes to sell their shares.
Anyone wishing to exit will usually have to offer their shares to the continuing shareholders, or back to the company, allowing the family to retain full control. Similar provisions will apply in the event of death.
It is also worth noting that for any assets being transferred into the family investment company, appropriate legal documentation should be prepared.
Specialist Family Investment Company Solicitors
At Frettens, our Corporate & Commercial Team is one of the most experienced in the area and are happy to assist you with setting up a Family Investment Company.
If you have any questions following this article, or would like to discuss your circumstances with our team, please don’t hesitate to get in touch on 01202 499255 or by filling out the form at the top of the page.
We offer all new clients with a free initial chat
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