Family Investment Companies (FICs) can be a topic of conversation when considering different IHT mitigation strategies. Quilter says that tt is essential to understand the basics of the FIC and how this compares with a trust structure.
How does a FIC work?
A FIC is a company set up to hold family wealth. The founder transfers assets into it, such as cash, shares or property, or may fund it by way of an interest-free loan.
At outset, the founder usually owns all the shares, so moving assets into the company is not, by itself, a gift for inheritance tax purposes. IHT planning is usually achieved by gifting shares to beneficiaries over time.
Those gifts are normally potentially exempt transfers, so the value falls outside the founder’s estate after seven years.
Alphabet shares provide the control
Much of a FIC’s flexibility comes from Alphabet shares. Different share classes can carry different rights, allowing the founder to separate value from control:
- Voting rights on company decisions, such as the appointment of the company director
- Rights to dividend distributions when they arise
- Right to capital when the company is wound up
The founder may retain the shares that carry control, while gifting other classes over time. This can allow them to keep influence over the company while passing future value to the next generation in an IHT-efficient way.
Inheritance tax treatment of the shares
FIC shares will not usually qualify for business relief because the company is generally an investment company rather than a trading company. Gifts of shares are therefore normally PETs, so inheritance tax may arise if the donor dies within seven years.
The shares also form part of the recipient’s estate. However, a minority holding may be worth less than a simple proportion of the company’s total value because it carries limited control.
Spreading shares across multiple beneficiaries can therefore produce a discount in their valuation, subject to HMRC approval. Additional care is also required for spouses / civil partners as their holdings will be pooled together to determine their eligibility.
Additional flexibility through loans
Many FICs are funded by an interest-free loan from the founder. The loan remains in the founder’s estate, but the shares may start with a lower value because the company owes the debt.
If those shares are gifted, future growth may sit outside the estate while the founder can still recover capital through loan repayments.
Who might use a FIC?
FICs are most likely to appeal to very wealthy clients who want to pass value down generations without giving up control. A FIC can work well where the underlying asset is illiquid or hard to divide, such as property.
Joint ownership is possible, but bringing in more owners can mean Land Registry changes and more complex decision-making. Using a company allows the economic value to be split through shares while legal ownership stays with the company.
The trade-off is cost and complexity, as a FIC will usually need ongoing legal, tax and accountancy support. Where assets other than cash are transferred into the company, there may also be other tax consequences to consider, such as capital gains tax or SDLT.
Consider a trust alternative
For many clients, a trust may achieve similar aims more simply. A discretionary trust can still provide control through the trustees, flexibility over who benefits and when, and an established structure for passing wealth between generations.
The tax treatment is different. A transfer into discretionary trust is a chargeable lifetime transfer rather than a PET, so the nil rate band matters and there may be entry, periodic and exit charges.
Even so, trusts are often simpler, cheaper and more familiar than a bespoke FIC.
A discretionary loan trust may be the closest trust-based comparison. Like a loan-funded FIC, it allows the original loan to remain in the settlor’s estate while future growth sits outside it.
As ever, the most suitable structure will depend on the client’s objectives, circumstances and appetite for complexity.
Main image: family, roberto-nickson-smJ6XsYy8gA-unsplash
