We have helped with the incorporation and legal structuring of a number of family investment companies (FIC) recently. It is worth considering them as part of a strategy for inheritance, succession and wealth planning.
Take the example of parents who want to pass wealth to their young children but do not want the children to have access to money at a young age. Trusts are often the natural choice. However, the law around them can be complex and they are not always tax efficient. Most business people will be familiar with the concept of a limited liability company and how it operates – this is one of the main attractions of a family investment company. A further attraction is the degree of flexibility they provide – they can be fine-tuned to a family’s particular circumstances or requirements.
What are family investment companies and how do they work?
The parents form a company limited by shares. They own one ‘A’ share each. Each ‘A’ shareholder has the right to appoint one director, and the right to vote at general meetings, but they have no entitlement to dividends or any return of capital. The children have one ‘B’ share each. These ‘B’ shares have no voting or other ‘control’ rights but full entitlement to any dividends or return on capital (which must be approved by the parents).
The parents typically fund the company by way of loan. The company (under the control of the parents) acquires assets – anything from property, cars, art, trading companies etc. which generate a return. Income is either re-invested within the company, or is used to repay the parents’ loan. Any underlying capital value grows in the children’s name.
What are the tax considerations?
In simple terms, profit on an investment held in a company will be taxed at corporation tax rates, which may be up to 25% lower than if held in an individual’s hands. That is another of the main attractions of an FIC. They allow wealth to be passed to the next generation without IHT as value is passed on creation (although the seven year survivorship rule may apply where FIC shares are gifted).
Company expenses (eg. advisors’ fees, interest, loan repayments etc.) may reduce the corporate tax bill. Capital gains on the disposal of assets would fall to corporation tax rates which are likely to be lower than the applicable personal tax rates. Companies may still have the benefit of indexation allowances which are not available to individuals. It may be possible for the initial loan to the company to be repaid tax free. Dividends received in a group structure may be payable to holding company without tax.
Note though the transfer of an asset into an FIC may attract CGT for the transferor; depending on the CGT position, it would generally be more effective for the FIC to acquire assets itself, funded by a loan.
It is important that tax advice is sought early on as this will play a significant part of any FIC structure. However, in general terms the tax provisions are most beneficial if the income and capital is held within the company for a long period of time.
How is control maintained?
In the earlier example, the ‘A’ shareholders have absolute say on what the company does, what it invests in, and how any return on investment is applied. No ‘B’ shareholder has any right over this. This control regime would on the face of it survive the parents’ separation or divorce. However, the parents may want to consider appointing a third director between them – the sort of person who may be a trustee or guardian who would act in the children’s best interests, to ensure a voting majority can be achieved. The ‘A’ shareholders can equally appoint professionals to advise/manage the investments on their behalf – but the underlying control dynamic (from the children’s perspective) is unaffected by this.
Other key control measures would include restrictions on the appointment of directors and transfers of shares. These would typically be contained in the company’s articles of association. The articles also allow flexibility over changes to voting, income and capital and the issue of redeemable shares which may be useful as the children get older and may have some need to access funds.
Setting up a company limited by shares can be achieved quickly and inexpensively. Most of the key provisions relating to directors, voting and control, and share class rights can be set out in the articles of association. As the articles are a public document (they are filed at Companies House, and available for inspection by anyone on the Companies House website), any sensitive provisions can be set out in a separate shareholders agreement.
The directors of an FIC would be subject to the usual statutory obligations, and, as with any other company, it is the responsibility of the directors to ensure that these obligations are complied with. So, for instance, annual filings will have to be made at Companies House and statutory registers maintained, but these should not be significant burdens for a simple company limited by shares.
Why might you consider one?
- FICs are tax efficient compared with a trust, especially for longer term investments.
- The company structure is familiar to many people who want to protect and shelter wealth.
- They allow a measure of flexibility to ensure there is appropriate control, protection and availability of funds.
- The flexible structure may protect assets in the event of divorce or against creditors.
Author: Anthony Young
The contents of this article are intended for informational purposes only. The article should not be relied on as legal or other professional advice. Neither Vistra Group Holding S.A. nor any of its group companies, subsidiaries or affiliates accept responsibility for any loss occasioned by actions taken or refrained from as a result of reading or otherwise consuming this article. For details, read our Legal and Regulatory notice at: http://www.vistra.com/notices . Copyright © 2023 by Vistra Group Holdings SA. All Rights Reserved.
The SEC’s new private fund adviser rules: Who’s affected and how to prepare
21 Sep 2023
In August 2023, the US Securities and Exchange Commission adopted new rules and amended others to enhance the regulation of private fund advisers. According to the SEC, the changes are “designed to protect private fund investors by increasing…
Process agents: What they do and when you need one
20 Sep 2023
New ISSB standards could bring clarity to sustainability disclosures
13 Sep 2023
Switching from an EOR to a legal entity? Here’s what actually happens
06 Sep 2023
Top five challenges — and solutions — when setting up a cross-border private equity fund
30 Aug 2023
International expansion and operations basics
26 Sep 2023