Overview: Family investment companies
A growing trend of late has been the increasing use of family investment companies. Our corporate & commercial team gives an overview of what they are and their benefits.
What is a family investment company (FIC)?
A FIC is most commonly a private company limited by shares which has been specifically created by one generation of a family to accumulate wealth and facilitate passing it on to the next generation in a tax efficient way.
The share structure of a FIC and its constitutional documents (its articles of association) are specifically tailored to suit the family’s needs and objectives. Very often the ‘founding generation’ will wish to retain control of the FIC and its funds. This is usually achieved by that generation retaining control by holding the shares with voting rights and appointing themselves directors. This enables them to determine when, how and if funds can be passed down to the next generation.
Why use a FIC?
The answer to this question would itself merit an article. With detailed financial and legal advice, a FIC can be a vehicle to accumulate wealth and manage the succession of that wealth to the next generation, whilst mitigating tax exposure (particularly in relation to inheritance tax) and retaining the flexibility to provide financial assistance to the next generation as the need arises.
For example, a FIC will typically have in issue different classes of shares to different generations or to specific individuals. This enables the founding generation (if they are directors of the company) to have flexibility as to when and if to declare dividends and to which class of share, thereby enabling them to help different shareholders at different times and with different amounts. Income can also be drawn by way of a salary to directors or by way of debt (essentially by withdrawing cash from the company in the form of interest or loan repayments).
Is it different to a discretionary trust?
Yes. Advice should always be sought to ensure the most appropriate structure is selected for what is trying to be achieved.
In very general terms, a discretionary trust can be better for small funds or for holding assets for beneficiaries not yet born or identified, whereas a FIC can be more beneficial to hold large capital sums and make long term investments whilst producing an income for shareholders. Detailed financial and legal advice should always be obtained.
How is a FIC set up?
Either by incorporating a new company in the same way as for any new company or by converting an existing company – although this could bring its own tax implications so – as detailed above – financial and legal assistance should be sought to ensure the most appropriate structure is adopted to facilitate the parties’ aims.
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