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Family Investment Companies – an effective alternative to Trusts?

Our expert speakers Alana Graham and Kim Klahn examine how Family Investment Companies (FICs) can be used to manage and transition wealth to the next generation.

Trusts – a useful estate planning tool

A trust is the transfer of assets to legal owners who then hold the assets as trustees. Trusts are widely accepted useful estate planning tool, with individuals appointing themselves as a trustee to maintain a measure of oversight and control over how money and assets are used and invested.

The trust deed can set out quite specifically how assets should be dealt with and who the benefactors will be or it can give trustees more flexibility and wide-reaching discretionary powers.

Trusts can therefore offer a protective environment for holding assets for a family, but they can also offer significant tax benefits, which is why they are such a key tool in the estate planning toolkit.

However, if you are looking to put more into a trust than the IHT allowance of £325,000, then this is subject to a 20% initial inheritance tax charge.

Why make use of a family investment company?

Setting up a trust is a good starting point, but family investment companies (FICs) can offer a different structure through which individuals can pass on larger sums of wealth to the next generation whilst maintaining control over the assets – and they can also be more tax efficient.

A FIC is essentially a private limited company with bespoke articles of association, and whose shareholders are family members. The directors of the FIC have day-to-day control and management of the company, whilst the shareholders have the ownership, rights to participate in income of the company, and any capital on winding up.

There will also be a shareholder’s agreement, which is a contractual document between the shareholders (family members). The benefit of a shareholder’s agreement is that it is a personal document which can contain provisions which are not held in the public domain.

When is a family investment company useful?

FICs are useful when an individual is looking to transfer more than the IHT allowance of £325,000. They are often used by people with large sums of money which is set to be used as a form of succession planning. They are particularly appropriate for business owners who are familiar with the processes behind running a company.

There are also certain circumstances of divorce and bankruptcy through which income and gains can be accumulated in a more tax efficient way than if they are held in a trust or personally.

Family investment company or trust?

The main difference is the article of association – which are drafted on a bespoke basis.

The solution to complex wealth management needs may well be a combination of both a trust and a financial investment company.

A FIC is a useful vehicle which can be used to tackle estate planning – when used in the right circumstances. However, every situation is bespoke, and it is vital to seek legal advice when setting up such estate planning measures.

Looking for more information? Watch our recent webinar on FICs below:

More about our speakers:

Alana Graham

Alana Graham is a qualified barrister and a tax, estate planning, wills and trust specialist and has recently authored a chapter for Tolley’s on family investment companies. Alana will explain Family Investment Companies and the advantages and disadvantages, along with tax implications that should be considered.

Kim Klahn

Head of Lodders’ Corporate and Commercial team, Kim Klahn is a company and commercial law specialist. Kim will provide an overview on the corporate structure of an FIC, and will advise on what controls can be put in place with regard to its articles of association and shareholders.

More information

For more information on FICs and future planning, please get in touch with a member of the Private Client team now.

Publishes 21st May 2021. Updated 2nd July 2021.

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For more information on FICs and future planning, please get in touch with a member of the Private Client team now.