Needing a Trust alternative
Since 2006 Trusts have become less attractive as a structure for managing family wealth due to increasing restrictions and greater regulations. The wealth management market started searching for an alternative that could offer the wealth protection that used to make Trusts so appealing but with greater tax efficiencies.
Along came the Family Investment Company. Although the Family Investment Company or FIC is nothing new, the use of a FIC is becoming increasing popular. The structure normally uses an ordinary limited liability company, but the directors and shareholders are family members.
The Appeal of the Family Investment Company
The Family Investment Company offers a level of simplicity and control that a traditional Trust structure cannot. With a FIC, the directors maintain control over the assets because shareholder rights and benefits can be varied using different share classes with different rules, or through the number of shares in an issue. The directors of the company will usually be the parents and will then have control over the investment decisions and income distributions.
But the real appeal to Family Investment Companies are the tax efficiencies. Unlike Trusts, which are governed by the inheritance tax nil rate band and can see an upfront charge of 20% on large cash settlements, any amount of cash can be transferred into the FIC, in return for a loan or shares, tax-free. And a FIC is not liable to any periodic charges of IHT such as the 10-year charge on a Discretionary Trust. The company can then be used as a long-term investment vehicle that is taxed at the corporation tax rate of 19% as opposed to the personal tax rate which could be up to 45%. This lower rate of tax also means that a FIC has more money to re-invest so will see faster growth than a Trust, which makes them attractive as an investment vehicle in their own right. Add to that the fact that no corporation tax is payable on the majority of dividends and that management and business expenses are deductible for tax purposes, it is no wonder that the FIC structure appeals to wealthy families who are looking to pass on wealth as tax efficiently as possible.
Remember the small print
The downside is that the company will not qualify for business property relief, as it is not a trading company, so there will be IHT liable on death. It is also worth considering that while cash transferred into the company is tax-free, shares and other property may be subject to capital gains tax. Corporate tax is also set to increase in 2023 to 25%, taking it above the basic rate for personal tax, and future increases to the rate cannot be ruled out. Although it is highly unlikely that the rate will ever increase to be equal with the highest rate of personal tax. The HMRC may also change regulations relating to investment companies as they put the Family Investment Company under scrutiny to try to recover some of the tax they are losing to this kind of wealth vehicle.
Overall, for families with a significant amount of cash, a FIC is likely to be the current favourable solution over a Trust and you will need to be able to manage the on-going administration for the company alongside any Trusts you already manage. But while there is a market for trust administration software those same systems are not adequate Family Investment Company software solutions. Somehow Family Investment Company software seems to have been forgotten amongst other wealth management requirements.
Dedicated Family Investment Company Software
Thankfully, you will be happy to hear that WealthWorks+ is capable of managing any entity, making it simple to administer a FIC, Trust or any other wealth structure that your clients might require. You could call it the only Family Investment Company software platform on the market.
Contact us now to book your free software demonstration and see the power of our advanced Trust and Family Investment Company software for yourself.