Could a family investment company help you pass wealth to the next generation while retaining control over how it is managed?
Partner & Head of Corporate & Commercial, Karen Edwards, was invited to join Baggette + Co Wealth Management's podcast alongside Oscar Hjalmas and Alistair Wallace (BKB Accountants). They spoke about how family investment companies (FICs) work and the role they can play in managing family wealth.
Watch the full video here or read the summary article below.
What is a family investment company?
A family investment company, often shortened to FIC, is a company established to hold and manage investments for a family. These might include property, cash or an investment portfolio.
What is the difference between a family investment company and a standard company?
Unlike a company set up to trade, a family investment company primarily holds investments and supports the family’s plans for managing and passing on wealth.
Although the name sounds specialised, the starting point is an ordinary company. What makes the difference is how its ownership, management and legal documents are structured.
What are the advantages and 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 given to the practical aspects of setting this type of company up beforehand.
How can you pass on wealth while keeping control?
One of the main topics in the discussion is the use of different classes of shares.
For example, parents might act as directors and hold voting shares, allowing them to make decisions about the company’s investments. Children, or trustees holding shares for their benefit, might hold a different class of shares that allows them to benefit from future growth.
The rights attached to each share class need to be carefully drafted. Who controls the company, who receives income and who benefits from its value are separate questions.
There is no single structure that will suit every family.
Can a family investment company help with inheritance tax planning?
A FIC can form part of a longer-term inheritance tax planning strategy, particularly where the intention is for future investment growth to benefit younger generations.
However, putting assets into a company does not automatically remove their value from your estate or eliminate inheritance tax.
For example, a parent may lend money to the company through a director’s loan. The outstanding loan remains an asset that belongs to that parent and needs to be considered in their estate planning.
It is therefore important to look at the whole arrangement, including what you retain personally and how you expect to access money in the future.
Our expert Corporate & Commercial Solicitors and Estate Planning experts can help guide you through this process in plain English. Get in touch on 01202 499255 or by filling out the form.
What tax considerations should you consider with family investment companies?
Potential inheritance tax savings are only one part of the picture. Tax should be considered in three stages:
- When setting up: What are the implications of transferring cash, property or other assets into the company?
- While it is running: How will investment income and gains be taxed?
- When taking money out or bringing the arrangement to an end: What further tax costs could arise?
Transferring an existing property or investment can have tax consequences. Withdrawing profits can also create additional tax costs, affecting whether the arrangement is worthwhile.
These questions should be explored with your tax and financial advisers before committing to a structure.
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.
If you are looking to set up a family investment company, our specialist Corporate & Commercial Solicitors can help guide you through the process. Get in touch on 01202 499255.
Why is a shareholders agreement important?
Family relationships can change, even when everyone agrees at the outset.
Therefore, it is important to have a private agreement that sets out how the shareholders will deal with particular situations.
It can address questions such as:
- What happens if someone wants to sell their shares?
- Should family members have the first opportunity to buy shares?
- What happens following a death, relationship breakdown or bankruptcy?
- How will disagreements be handled?
Discussing these issues before embarking on setting a family investment company up gives everyone a clear understanding of the arrangements and can help reduce uncertainty later.
Our expert Corporate & Commercial team can help you draft a Shareholders Agreement to address these issues early on. Get in touch with a member of the team on 01202 499255.
When might a family investment company be unsuitable?
A FIC may be less suitable if you need most or all of the investment income to meet your living costs.
Setup costs, ongoing administration and the taxes associated with withdrawing profits can outweigh the potential benefits.
Your plans should therefore account for your own financial security as well as what you hope to leave your family.
Considering a family investment company?
A FIC needs to be designed around your circumstances. Your solicitor, accountant and financial adviser can work together to assess your objectives and establish whether the structure is suitable.
Our Corporate & Commercial Team is one of the most experienced in the area and is happy to assist you with setting up a family investment company.
If you are considering a family investment company, get in touch with one of our expert Corporate & Commercial Team members on 01202 499255 or by filling out the form. We offer all new clients a free initial chat.
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