Family Investment Companies (FICs): What you need to know

What is a Family Investment Company or ‘FIC’?

A “Family Investment Company” or “FIC” is a term used to refer to a company which holds family investment assets (generally not trading assets), such as investment properties or a portfolio of quoted shares and bonds.

Why establish a FIC?

FICs can be an attractive option for succession planning and general UK tax planning because they:

• are generally subject to tax on investment returns at lower rates than individuals;
• enable wealth to be passed to future generations while allowing parents to retain control over the assets;
• can help with asset protection; and
• can be set up in a number of ways and therefore offer flexibility and the ability to be adapted to a particular set of circumstances and needs.

Flexibility of FICs

One of the advantages of a FIC is that it can be tailored to a particular individual’s or family’s situation and needs. For example, there are much more complicated versions of the planning which include many different share classes to allow for more tailored treatment of the economic rights.

Taxation of FICs

The taxation of FICs is often a key driver for considering them. They can offer a lower tax environment than, say, personal ownership and trusts, particularly on the accumulation of income, and this can allow wealth to grow more quickly. For example:

• Dividends received by a FIC are often entirely tax-free (whereas an individual might pay income tax at a rate of up to 39.35%)
• FICs are normally subject to the 25% rate of corporation tax on other forms of profit as opposed to the maximum income tax rate of 45% (soon to rise to 47%) which individuals can pay
• Certain expenses incurred by the company may also be deductible when calculating taxable profits (no such deductions are permitted for individuals)

However, tax will always need to be considered carefully as there are some downsides. For instance, the 25% corporation tax rate is marginally higher than the 24% rate which individuals generally pay on gains and some tax reliefs available to individuals are not available to FICs.

Furthermore, if profits are subject to 25% tax within a FIC and are then distributed to shareholders who pay income tax on their dividend, the total effective tax rate can be closer to 54.5%.

As a result, FICs tend to be most tax efficient when their investments are tailored to take advantage of their particular tax treatment, and if returns are reinvested over the medium or long term.