A ‘Family Investment Company’ (FIC) provides a mechanism for control of assets to be retained whilst their value, or most of it, can be transferred away from the direct control of the transferor. In addition to IHT benefits, FICs can also provide substantial income and capital gains tax (CGT) advantages.
A typical candidate for a FIC would be a UK-domiciled individual who has surplus cash and other assets within their estate. Generally, the minimum capital contribution to a FIC would be around £1 million of cash and other assets. There is no limit on the amount that can be contributed to a FIC.
Where non-cash assets are contributed to share capital, the market value must be in line with – and cannot be lower than – the par value of the issued shares. In most cases a FIC will need to be set up from scratch, with the share structure tailored to meet the precise needs and planning objectives of the founding shareholder and their family. It is possible to restructure an existing company into a FIC but this may trigger tax exposures, particularly for UK resident shareholders.
Company shares generally have three distinctive characteristics: voting powers; the right to receive income in the form of dividends; and the right to capital (e.g. ownership of the underlying assets). It is, however, possible to create shares that carry only one or two of these characteristics. It is this flexibility that enables a FIC to minimise IHT exposure. The UK government are currently reviewing FICs but there has been no formal announcement to date. The expectation is that FICs which are simply structured and with a view to reducing rather than avoiding UK tax should survive any future legislation although this obviously cannot be guaranteed.
A FIC is a private company. The structure of a FIC can have many variations but, in a typical scenario, an individual could transfer assets into a FIC in return for its shares, which might be divided into three different classes:
• Class ‘A’ shares that carry votes, but no right to capital or income • Class ‘B’ shares that carry rights to income and capital, but no votes • A ‘Golden Share’ that carries management rights in respect of directors, shareholders and the share structure.
The founding shareholder (the founder) will transfer cash and/or other assets into the company in exchange for all the issued shares. The rights attaching to the ‘Golden Share’ would be entrenched in the Memorandum and Articles of Association (M&As) of the company from the outset.
The ‘Golden Shareholder’ would generally be an independent professional trustee, such as Sovereign, which would have the power to dismiss and appoint new directors and would have to authorise a disposal of shares or a change in the share structure.
Sovereign has developed two types of FIC: an onshore model that is suitable for UK residents; and an offshore version that can be used by expats residing overseas, typically in countries with a source-based tax system such as Hong Kong and Singapore.
It is important that UK tax planning is underpinned by UK advice which we can source from an independent UK tax counsel or professional adviser.