London’s business owners will likely be familiar with trusts as a route to protecting their assets. But this type of planning, while tried and tested can only go so far. Richard Bate, partner in the Private Client team at law firm Weightmans LLP, explains why Family Investment Companies are now becoming more commonplace.
Trusts have long been a mainstream part of estate planning. They allow for the giving of up to £325,000 tax-free for the benefit of family members and could be useful if a family member was to face financial or matrimonial issues later down the line. For tax purposes, so long as the person making the gift outlives it by seven years, the value falls outside of their estate upon death. However, the popularity of trusts has declined in recent years due to changes to their tax treatment – putting more than £325,000 into trust incurs an unpalatable 20% upfront charge.
This is where Family Investment Companies (FICs) come into play and are increasingly turning heads.
In recent years, FICs have evolved from being a specialist structure used primarily by ultra-high net worth individuals to becoming a common form of estate planning, particularly for business owners who have undergone a transactional event like selling their company or taking on external equity or investment.
Years of rising house prices – not only in London but across the country – a booming stock market and increased wealth across generations has led many people to investigate ways to reduce their inheritance tax bill without being limited by the £325,000 trust threshold. Alongside this, the rising cost of living, particularly London’s soaring rent costs and property prices, means that more young people are experiencing delayed financial maturity, placing increasing pressure on parents to ensure that their assets are protected for longer.
An FIC is as straightforward as it sounds. It is a company, set up by and for family members, to manage investments rather than operate a trade.
In many ways it acts like a trust. But one of its main attractions is that there is no limit to the amount that can be added to an FIC before becoming liable for Inheritance Tax. They also currently attract favourable ongoing tax treatment compared to the standard trust model, with income and capital gains all being taxed at lower corporation tax rates.
In an FIC, the governance and distribution of investment wealth is tailored to a particular family’s needs. The creator of the FIC often owns shares that have rights to vote attached to them and can also determine when dividends can be paid and who is entitled to any future capital value. An FIC could be set up, for example, so that children own different classes of shares, none of which have voting rights or an entitlement to dividends. The creator can then determine which class of share should receive a dividend year on year. This provides complete flexibility when it comes to distributing profits among the family, limiting the risk of irresponsible spending.
For many, FICs are easier to understand than trusts. After all, business owners are used to how companies operate with board meetings, minutes and resolutions, whereas trusts are comparatively opaque and complex. And it’s very straightforward when it comes to setting one up – assets are typically transferred into the FIC by way of a loan or simple cash transfer. The person setting up the company could receive an “income”, if necessary, through repayment of the initial loan. They’re usually appointed as a director, along with other family members, as a way to educate them on how to run a company and manage money.
But FICs aren’t for everyone – as is this case with a number of estate planning tools. They’re also subject to tax changes in the future, which might diminish their appeal. That said, the benefits they reap mean FICs are worth considering as part of an overall estate planning review. Drawn to the attraction of benefitting from the money that’s invested, this alternative trust structure – already gathering momentum in London – fuels business growth as well as safeguarding the future of generations to come.