Family Investment Companies – What You Need To Know

Jul 8, 2024

With the rise in landlords buying property through limited companies, now thought to be more than 50% of all new buy-to-let purchases, the use of a Family Investment Company (FIC) structure offers landlords a robust long-term way to hold property and pass this to the next generation.

Understanding what a FIC is, how it works, and what it can and cannot due is crucial for any landlord considering using this structure. Here we go through the most frequently asked questions about FIC’s to dispel any myths, and misinformation and provide answers to commonly asked questions.

What is a Family Investment Company (FIC)?

A FIC is privately held company which holds investments rather than doing any kind of trading business. A FIC allows parents to retain control over the assets purchased by the company and any investment decisions by using different classes of shares each with their own rights. It is called a “Family” Investment Company, as normally all the shares are owned by members of a family, or Trusts set up for the benefit of that family.

Can anyone set up a Family Investment Company?

Yes. Anyone who has money, property, or investments to invest, and would like to do so using a company structure. Traditionally FIC’s have been used by business owners of trading companies to allow the involvement of children without diminishing their control. They have become more popular now with property investors who have started using limited companies to avoid high rates of tax and still obtain full tax relief on mortgage interest.

What kind of assets do Family Investment Companies normally hold?

Usually, FICs hold a mixture of cash, residential and/or commercial properties and/or investments, usually in listed companies. For landlords we recommend that they only hold property investments in a FIC to avoid being classed as a “close investment company” and not lose the 19% small profits rate if their taxable profits fall below the annual £50,000 limit.

How are properties added to a Family Investment Company?

Properties can either be purchased directly by the FIC or can be transferred to a FIC, though this will usually give rise to Capital Gains Tax implications and Stamp Duty Land Tax.

How are Family Investment Company shares structured?

FICs are set up with multiple classes of shares, each designated by a different letter of the alphabet. So for example a married couple with two children would have 4 classes of shares as follows:-

Husband Ordinary A shares

Wife Ordinary B shares

Child 1 Ordinary C shares

Child 2 Ordinary D shares

The different classes of shares can each have different rights to dividends, different capital rights (i.e. different capital amounts being due on the Company being sold or wound up), different voting rights, and different rights to appoint directors.

Who should own shares in the Family Investment Company?

Where shares have been set up with multiple share classes, often individual family members will own a different class of share each. These shares can be owned personally by the different family members, or in some situations they can be held in trust for them. This can be particularly useful if a parent wishes to protect and provide for a vulnerable child after they have passed away. 

One other advantage of using multiple classes of shares in this way is that the directors may pay different amounts of dividends to the various family members. In this way full use of any shareholders basic rate band can be utilised.

How are shares in Family Investment Companies passed to the next generation?

Shares can be passed by way of lifetime gifts, or on death in accordance with the shareholder’s Will (or the intestacy rules if there is no Will in place). Shares can either be given outright to individuals or can be held on trust for their benefit.

How can Family Investment Companies help with Inheritance Tax planning?

If the shares have any value, they will be subject to the usual Inheritance Tax rules. This means that if the person giving away the shares survives the gift by more than 7 years, then there is no Inheritance Tax to pay. However, if they do not survive a gift by 7 years, then the gift could be subject to Inheritance Tax on their death, calculated on the value of the shares at the date of the gift. FIC shares left by Will form part of a deceased’s estate, and if the Inheritance Tax threshold is exceeded, will be subject to 40% Inheritance Tax on their market value.

FICs can be structured so that different classes of shares receive different amounts of capital on a winding up. For example, classes of shares can be set up that only receive their nominal value, whereas other classes of shares can be set up which will receive all the future increase in the value of the company. This enables the future growth to be given away, so that it will not be subject to Inheritance Tax in the hands of the original Shareholder. In this way a parent can leave their shares to their children and avoid IHT.

What are the Capital Gains Tax consequences on making a gift of FIC shares.

As with any other shares, lifetime gifts of FIC Shares will be subject to Capital Gains Tax if the shares have increased in value since they were acquired. This means that any gain will be taxed at 10% or 20% (based on the current rates) depending on the individual’s Income Tax band. Gifts on death are not subject to Capital Gains Tax, as a person’s death washes away all capital gain. This means that the person receiving the shares (or the trustees) receive the shares at the date of death value.

Is there a minimum overall value for setting up a FIC?

There is no minimum value for setting up a FIC, though consideration should be given to the cost of setting it up as well as the annual administration costs involved in company compliance and reporting. 

For landlords if the intention is to hold a small number of properties say one or two then the use of a FIC may be questionable depending on the value of the property.

Many advisors suggest that FIC’s are not particularly economical if the value is below £1m, but for landlords we would dispute this. You may start off with one or two properties, but over time, particularly if you wish to hold on to the properties as part of your pension retirement plan and pass on this property wealth to your children, the values may have increased significantly over your lifetime.

Can a Family Investment Company help protect against divorce?

FICs cannot be ringfenced against divorce, but it can be difficult for the company’s assets to be used as part of a shareholder’s divorce or civil partnership settlement. Provision to help protect a FIC against relationship breakdown can be made in the FIC Articles, and reinforced with a robust shareholder agreement which restrict how shares can be transferred and also give a right for other shareholders to buy back the shares if they were to end up out of the family’s hands.

Pre or post nuptial agreements should also be considered. The consequence of these provisions is that the value of the shareholding may be limited in the event of divorce, which can protect against their forming part of a divorce settlement. 

How are Family Investment Companies taxed?

FIC’s are taxed in the same way as any other limited company and subject to the same allowances and tax treatment of income and expenses. 

Unlike trading companies, FICs are subject to Inheritance Tax on the full value of the shares and do not qualify for Business Property Relief. However, minority ownership discounts can apply, which take into account the minority owner’s lack of control over the company. For example, if a shareholder only owns 10% of the Company, a discount in excess of 50% may apply on the value of their shares (based on the net asset value of the company). This discount can be very useful for general family estate planning and can result in substantial Inheritance Tax savings.

Advantages of a Family Investment Company v Trusts

There is usually no immediate tax consequence of adding large cash sums to a FIC, whereas trusts are usually limited to a person’s available nil rate band (currently up to £325k), otherwise immediate Inheritance Tax may be due.

If dividend income is to be retained within a (discretionary) trust, it would be subject to Income Tax, and further tax when paid out of the trust. However, if this income was retained within a FIC, it would not be taxed at all.

A trust is subject to a 10 year anniversary tax charge of 6% on the excess of the assets above the nil rate band. FIC’s do not pay any tax on assets held in the company unless the property is not let out and is worth more than £500k under ATED (Additional Tax on Enveloped Dwellings).

What are the ongoing filing requirements of a Family Investment Company?

FICs, like any other limited company, have ongoing compliance requirements. Tax returns must be submitted each year, and accounts and confirmation statements filed each year with Companies House.

Can I make changes to the structure?

If the shareholders are all in agreement, they can change the company Articles of Association and restructure the shares. If they are not in agreement, it will depend on whether they have enough votes to do that under the existing Articles. For this reason, it is better to put changes in effect whilst there are only few shareholders able to exert control, rather than after shares have been diluted by passing them down the generations to multiple family members.

What if I want to close the Family Investment Company?

If for any reason you no longer wish to keep a FIC it is possible to close the company. You will need to decide whether you wish to transfer out the properties in the company or sell them first. A transfer or sale would entail Corporation Tax on any gains as the transfer would be deemed to be at market value and Corporation Tax would be payable by the company. The remaining funds can then be paid out as either a repayment of any outstanding directors loan or by way of dividend. Once there are no assets or funds left in the company it can be closed down.

If you have any questions on how this might affect you, get in touch on 01902 711370 or email enquiries@uklandlordtax.co.uk.

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