Why create a FIC?
A Family Investment Company ('FIC') is a bespoke structure which can be used as an investment vehicle for long term tax deferral and inheritance tax ('IHT') planning and can be tailored to each family's individual circumstances. A FIC can be an effective alternative to trusts or outright gifts for clients seeking to pass on wealth to the next generation to mitigate their IHT exposure, without relinquishing complete control over the assets/investments that are to be gifted.
How it works
Legally, a FIC is like any other company with share capital. The key bespoke elements of a FIC relate to:
- the structure of the share capital, for example, certain shares may confer voting rights on the shareholders whereas others may confer dividend rights and economic rights on a winding up;
- matters which deal with the appointment and removal of directors; and
- restrictions on share transfers outside the family.
Funding
Typically, a FIC will be funded by way of a cash loan from the first generation shareholders to the FIC, and their subscription for voting shares.
If assets other than cash are used to fund the FIC, it is important to remember that exposure to other taxes, for example Stamp Duty, Stamp Duty Land Tax or capital gains tax ('CGT') could arise if the assets are standing at a gain at the point of funding. That being said, for shareholders of an existing company or group of companies who do not wish to fund with cash, a FIC can be created by exchanging shares in the existing company for shares in the FIC and, if certain requirements are satisfied, this can be structured without triggering a tax charge.
Ongoing Taxation
A FIC incorporated in the UK will be subject to corporation tax on its profits (income and gains realised by the company on its investments). Likewise, the FIC will be treated as a UK company, thereby liable for UK taxes, if it is "managed and controlled" in the UK.
A FIC that receives dividend income is likely to benefit from the generous exemptions available to a UK resident company or a company resident in a country with which the UK has a qualifying double taxation treaty. This should mean that the majority (if not all) of dividends received by the FIC are free of corporation tax.
Obtaining liquidity and/or extracting value from a FIC
Income tax is paid by the company's shareholders as and when they receive value (as dividends) from the FIC. However, if loans have been used to fund the FIC, carefully structured loan repayments may be received by the lender without any income tax exposure, assuming there are profits in the FIC that could be properly used for that purpose.
When the time is right to bring the FIC to an end, the value of the FIC may be extracted by way of a liquidation. On a disposal of the shares on a liquidation of the FIC (or, indeed by sale or gift), shareholders should pay CGT on the gains represented by the proceeds.
Is a FIC an appropriate structuring choice?
On one hand, a FIC can provide (potentially long-term) deferral of tax allowing value within the company to grow whilst subject to corporation tax. As such, value can 'roll up' within a FIC while it would otherwise have been taxed in an individual's hands. In addition, as most dividends received by the FIC are exempt from corporation tax, it can be very tax efficient for the FIC to hold or invest in assets which produce dividend income.
However, effective use of FICs for short term tax mitigation purposes is hugely dependent on corporation tax rates remaining low. If these are brought closer into line with personal income tax rates, the benefits of the tax deferral are eroded. Also, setting up a FIC introduces a second layer of taxation. Therefore, a FIC will be unlikely to be a suitable structure where the shareholders need access to regular dividend payments or it is viewed as a short-term estate planning solution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
