A Family Investment Company (“FIC”) is a private company formed with the specific intention of managing and holding investments for a single family. FICs have become a popular method of structuring wealth and passing it down to younger generations. The main drivers for this have been the relatively simple structure of FICs, the ability to retain necessary levels of control and the declining popularity of trusts.
Structure and Control
There is a great deal of flexibility as to how a FIC can be structured. For a UK family, a FIC can be a limited or an unlimited private company incorporated under the Companies Act 2006 (“CA 2006”). A limited company is preferable for FICs that own property or undertakes activities that involve risk.
FICs are usually structured so that control and economic entitlement are separate. Control of the FIC and the underlying assets can be retained by a small number of family members, usually the founding generation, whereas income and capital rights can be held by a larger number of family members.
Control can be retained either by controlling the board of directors via entrenched rights in the articles of association or a shareholders’ agreement and/or enhanced or limited voting rights attached to certain shares. The CA 2006 provides a large degree of flexibility in relation to the appointment of directors meaning that a FIC’s articles of association can be drafted to tightly control the board as the founding generation wishes.
Protection
FICs can offer protection for family wealth from situations such as divorce by drafting the constitutional documents in such a way that shareholders are restricted to bloodline relatives. Compulsory transfer provisions can also be used to dictate when shares must be transferred on events such as bankruptcy or other circumstances which do not conform with the family’s expectations.
Share Capital
FICs typically have different classes of shares allowing dividends to be declared at different times with different amounts. The founding generation may wish younger generations to receive significant value from their shareholdings whilst they retain control as mentioned above. Preference shares, which hold a priority over ordinary shares to income, can be used where certain family members require a regular income. Growth shares, which have enhanced rights to capital, can be used to pass greater amounts of value in the long-term to younger generations.
Tax
FICs can have attractive tax benefits relating to inheritance tax as well as income and capital tax liabilities. For instance, a gift of shares by the founding generation to children or grandchildren would usually not trigger any immediate tax charge and provided the founding generation survive seven years from the date of the gift, no inheritance tax arises.
If you have an interest in establishing a FIC or would like to understand how a FIC may help your financial management, please contact us to discuss.
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Disclaimer: This publication is provided by Laytons LLP for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to your regular contact at Laytons LLP or Laytons’ Corporate team.”