Family Investment Companies
What is a family investment company (FIC)?
FICs are companies limited by shares (an “Ltd” or “Limited”) often setup by parents or grandparents (“Founders”) to benefit both themselves and their family as shareholders. Their popularity has increased in recent years, being seen as a corporate alternative to the more common discretionary trust. The FIC owns assets, such as property, generating income and capital growth, which can be distributed to the family shareholders over time, but always at the Founders’ discretion. Those assets typically come from the Founders themselves by way of a loan or outright transfer to the FIC. Each shareholder owns a different class of share (often referred to as “alphabet shares”) gifted to them by the Founders. Typically, the Founders’ shares will have all the normal rights to vote and receive dividends but not capital, whereas the gifted shares will only have rights to receive dividends and capital but not to vote. Doing so ensures that the Founders have the sole right to make FIC decisions, both at shareholder and board level, including dividend payments.
Why set up a FIC?
Founders use FICs to move assets from their personal estates into a corporate vehicle, which is then used to control those assets by them being the only shareholders with the power to vote and to decide on the composition of the board. This allows them to provide a controlled source of income for both themselves and their family over a period of time. If the Founders loan funds to the FIC, the loan can be repaid over time from the FIC’s posttax profits which, alongside any profit paid out by way of dividends, provides the Founders with an ongoing source of income. Alternatively, if the capital value of the loan is no longer needed, the Founders could gift the value of the loan to other family members moving the value of that loan out of their taxable Estate for Inheritance Tax purposes (subject to surviving the gift by 7 years). There are a number potential tax advantages when using FICs, but this will vary depending on the size of the investments/loans, the assets held by the FIC and the personal circumstances of the Founders. It is therefore very important to speak with a tax specialist at the very outset who can help advise on the tax merits of a FIC in light of each potential Founder’s requirements and circumstances. In addition to the potential tax benefits, Limited companies have the great advantage of flexibility, which is ideal for FICs where family structures, considerations, needs etc are forever changing. Shares can be transferred, new shares can be issued with different rights, the composition of the board of directors can be changed and so on, all at the Founders’ discretion.
How to operate a FIC?
FICs need bespoke articles of association and a shareholders’ agreement before any assets are put into the FIC and before any alphabet shares are transferred to family members. Together these documents will detail, amongst other matters, how the FIC will be run, how dividends are declared, when meetings are to be held, rights of shareholders including voting rights and rights on transfer and issue of shares. Ultimately, all operation of the FIC from its day to day activities to amending its constitution will remain at the absolute discretion and control of the Founders.
If you would like further information, please do not hesitate to contact Richard Clapham in our Corporate Department T:01483 411 531