Family investment company (FIC): how it works, the inheritance tax angle and set-up

A family investment company is one of the structures wealthier families use to pass assets down a generation without handing over control at the same time. It is not exotic. It is an ordinary limited company with carefully designed share classes. Here is what a family investment company is, where the potential inheritance tax advantage comes from, how it compares to a trust, and how you set one up.

What is a family investment company (FIC)?

In short, a family investment company is usually the normal, familiar limited company registered at Companies House. What sets it apart is its purpose: it exists to hold family assets and pass them on to the next generation, rather than to trade.

The thing that makes a family investment company different from your standard limited company is its clever use of different classes of shares. That is the whole mechanism, and it is worth understanding properly.

FIC share classes: parents vs children

A family investment company has different classes of shares. For example, there is one class for the founders, let's call them the parents, and another class for the children.

• The children's shares typically carry the monetary value of the company. If the company's assets grow, that growth sits with these shares.
• The parents' shares carry the control: the right to vote on important matters.

So value and control are separated. The children own what the company is worth; the parents decide what the company does. Take a company holding a portfolio of rental properties. The rent and the capital growth belong, through their shares, to the children. Decisions about which property to buy, sell or refinance stay with the parents, because only their shares vote.

It is important to note that the share classes, and the family investment company overall, can be created completely bespoke to a client's requirements. There is no set way that a family investment company must look or must follow. The two-class structure above is a common starting point, not a rule. Some families want more than two classes, for example a separate class for each child, or different rights for grandchildren. The articles of association can be drafted to do whatever the family and its advisers decide.

Family investment company inheritance tax benefits

Usually, the second class of shares, the one for the children, is gifted by the parents to the children. If the parents survive for at least seven years from the date of the gift, then typically the gift would escape inheritance tax. It would not form part of their estate when inheritance tax is calculated.

That is the potential inheritance tax advantage in a sentence: the value of the family's assets is moved into the children's hands early, while the parents are alive, so that it is not inherited on death. I say potential because it depends on the parents surviving the seven years, on how the gift is made, and on the tax advice the family receives. It is not automatic. If you want to go further and keep future growth out of the parents' estate from day one, growth shares are the usual tool, and I cover them in growth shares for inheritance tax planning.

Family investment company vs trust

The main advantage of a family investment company, outside the potential inheritance tax advantages, is that the parents, as founders of the company, retain control of the company, of the assets it holds, and of how those assets are managed and invested.

That is unlike a trust. As the word implies, the parents who set up a trust need to trust someone else to manage it for them. That person cannot be the parents who created the trust, and it cannot be the children who benefit from it.

With a limited company, the parents can remain shareholders carrying the right to vote, and they can also remain the directors, making decisions on behalf of the company. In practice that means the parents keep running the family's investments the way they always have. They decide what the company buys, when it sells and how the money is reinvested. The only thing that has changed is who owns the value. For many of the clients I see, that combination of giving away the value while keeping the decisions is the reason they choose a company over a trust.

How to set up a family investment company

First, a disclaimer. You should always seek specialist tax advice that is tailored to you and your situation. I am a corporate solicitor and I often set these structures up for clients, but I do not specialise in tax matters specifically. I typically work alongside the client's tax adviser, and the tax advice drives several of the decisions below.

With that said, the legal mechanics are fairly simple. There are two routes, depending on whether you are starting from scratch or already have a company that holds the family's assets, and the paperwork is slightly different for each.

Setting up a new limited company as an FIC

If you are starting fresh:

• Incorporate the company. You incorporate the limited company as you would any other entity at Companies House, for example by following the online questionnaire.
• Upload bespoke articles of association. Typically you would upload bespoke articles that create the different classes of shares, rather than relying on the standard model articles. The articles are where the split between value and control is actually written down, so they need to be drafted before the company is formed, not bolted on afterwards.
• Issue and gift the shares. Depending on the tax advice you have received, you would either receive the shares yourself as the parent and then gift a class of shares to your children, or give shares directly to your children immediately. Which route is right for you is subject to that advice. The difference matters because the seven-year clock runs from the date of the gift, so the timing and the route of the gift are tax questions before they are legal ones.

Converting an existing company into an FIC

Until now we have assumed you are setting up a new limited company to be designated as a family investment company. But it is very possible that you already own and operate a limited company that holds family assets, such as properties. In that case, you do not need a new company. The existing company becomes the family investment company, and the assets it already holds stay where they are.

• Adopt bespoke articles of association. Typically this is done by passing a special resolution, so you will need at least 75% of the voting rights. The new articles set out the different classes of shares and the economic rights, if any, attached to each class.
• Create or issue the new shares. Once the articles allow for the new class, the company creates or issues those shares.
• Gift the shares. The new shares are then gifted, for example, to your children, again in line with the tax advice.

The practical steps for creating a new share class are covered in detail in how to create different classes of shares.

Next steps

If you hold family assets, or expect to, start by taking specialist tax advice on whether a family investment company suits your circumstances and on how the shares should be gifted. Then speak to a corporate solicitor about drafting bespoke articles of association that create the right share classes, whether that is for a new company or by special resolution in a company you already own.