Since the radical changes to trusts in the 2006 Budget many families with complex business and investment requirements have opted to use a Family Investment Company or ‘FIC’ over a traditional trust structure.
Neither offers a ‘silver bullet’ as each vehicle has its own advantages and disadvantages and the best structure for the family may be a blend of the two.
A FIC is essentially a company structure used to facilitate estate planning via the passing on of wealth in the form of company shares. Using a company structure enables family members to retain some control over the running of the company and can provide an efficient option to wealth accumulation.
A trust is a legal relationship created by an individual placing property, investments or other assets under the control of a trustee (or trustees) for the benefit of one or more beneficiaries. Beneficiaries of trusts do not have any immediate rights to the underlying capital of a trust, which is looked after by the trustees, providing a layer of protection for the underlying trust assets.
This article aims to provide a brief overview of some of the differences between the two structures and the circumstances in which they may be used.
Below are some scenarios that would favour a trust or an FIC:
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Family Investment Company
Any amount of cash can be put into a FIC by way of loan or equity investment without a tax charge. It can then be used to acquire property or other investments. Conversely, an individual can only transfer the up to the value of their available nil rate band (currently £325,000) into a trust without triggering an immediate charge to inheritance tax at the lifetime rate of 20% (unless other reliefs are available).
Companies benefit from Corporation Tax rates (main rate currently 25%). If profit is left in the FIC and reinvested, less tax will be paid whilst it is held within the company than if the assets were held directly by a trust structure and retained within the trust.
FIC is a company like any other. It has share capital, which can be structured with different classes to achieve different aims. It is run by its board of directors, which can be family members, but need not be. This may be more familiar than a trust structure.
If an unlimited company is used (as opposed to a limited company), it does not need to file accounts, so its value remains confidential. The trade-off is that the liability of shareholders is unlimited. However, many FICs hold relatively passive investments so liability is not an issue, unlike a trading company. As a result, FICs are commonly unlimited companies.
Trust
Assets which are standing at a gain may be transferred into a Trust and the capital gains tax which would otherwise arise on a gift may be deferred if certain conditions are met. Whilst this doesn’t wipe out the gain it may be that the gain can be managed over time.
If you have existing family trusts then the way in which a trust works may already be familiar to you. It is often the case that trusts for the same or a similar pool of beneficiaries can be managed efficiently alongside one another.
Where there are family members who are vulnerable or lack capacity then a ‘vulnerable beneficiary trust’ has various tax advantages. This also avoids assets being held by the vulnerable person which could cause complications in the future including the need for deputyship orders and statutory Wills.
A discretionary trust leaves the value and timing of any distribution of trust income or capital to the discretion of the trustees. This means that the trust is easily able to adapt to changing circumstances. Assets may easily be divided up between beneficiaries if it is decided at a later date that the protective structure is no longer required.
Individual beneficiaries can be given the right to live in any trust property, with CGT advantages if this is their main home. It is much more complex with potential tax consequences to allow an individual shareholder to live in a property owned by the company.
If a beneficiary has matrimonial or financial problems, or is unable to look after his or her property because of some disability, age or is just not careful with money, a trust structure can protect the underlying assets of the trust, while being able to provide financial assistance and support to the beneficiary.
Case Study
Mr and Mrs Smith recently sold their family run business for £15million. They are concerned that their estate now comprises a significant cash asset that is vulnerable to inheritance tax on their deaths (before the sale, the main value of their estate was held in their company shares, which qualified for 100% business property relief).
Mr and Mrs Smith have three adult children and two grandchildren, with the potential of more arriving in the future. Of their three children, one is married, one is in a long-term relationship and the other is recently divorced. Mrs and Mrs Smith are cautious about passing significant sums to their children directly, as they would not want to see any gift to their children diluted on a subsequent divorce or relationship breakdown. Asset protection is therefore an important consideration in their succession planning.
Mr and Mrs Smith have some knowledge of trusts, but due to the value that they are looking to set aside for their succession planning goals, while the asset protection element of trusts was very appealing, the inheritance tax entry charge was prohibitive.
Mr and Mrs Smith decided to set up a new UK Limited Company as a vehicle to carry out their succession planning. This entity is known as a FIC.
Mr and Mrs Smith have £8million of surplus cash to introduce to the FIC. Money may be introduced by different methods, including interest free loans, subscribing for shares and gifting cash to family members to subscribe for shares. Different corporate structures may also be used, including preference shares, growth shares and shares with different voting rights.
Mr and Mrs Smith opted to finance the FIC via interest free loan notes and subscribed for both ordinary shares with full voting rights and for non-voting growth shares. The growth shares were then immediately transferred into three separate family trusts, one for each child and their family. This allowed the trusts to be constituted with negligible value, protecting Mr and Mrs Smith’s nil rate bands and enabling any growth in the FIC to accumulate outside of their estates, but in a protected manner.
Mr and Mrs Smith retained control of the company through their ordinary shares and under current rules were able to extract funds from the company tax efficiently whenever they required, by way of partial repayment of the loans made.
As part of their ongoing planning, Mr and Mrs Smith then later assigned the benefit of £1million of the outstanding loan note to each of their children by way of an absolute gift, without creating an immediate charge to inheritance tax. If Mr and Mrs Smith were to survive the gift by seven years, the value would fall outside of their estate for inheritance tax purposes.
Mr and Mrs Smith intend to continue to use their FIC as part of their ongoing estate and succession planning by appointing the children as directors of the FIC and slowly gifting them voting shares, so they may become more involved in the management of the FIC in preparation for when Mr and Mrs Smith ultimately pass over responsibility of the day to day management of the FIC. Bespoke protections and restrictions can be included in the FIC’s Articles and shareholder agreement to try to ensure that the benefit of the FIC stays within the family and has some protection against third party influences.
The above is simply an example of what could be achieved with a FIC. However, no two cases are the same and bespoke advice should be obtained suitable to individual objectives.
So, to summarise
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Key features |
Trust |
Family investment company |
| Management |
Trustees |
Directors (family members) |
| Ownership | Trustees hold the legal title of trust assets on behalf of the beneficiaries |
Shareholders own the shares- being individual family members and/or family trusts. Underlying investments are owned by the company |
| Assets | Cash, property, land, chattels |
Cash - used to acquire assets such as land, property, shares or other investments Other assets such as existing investment portfolios and business interests may be used, but subject to additional corporate and tax advice |
| Compliance |
|
Documents to filed at Companies House:
Corporation tax return. |
| Risk |
|
|
| Confidentiality | No public record of trust assets or income (currently) |
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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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