Family Investment Companies: the modern trust?

Onshore trusts have historically been a staple of private wealth work, but their popularity in the UK is on the decline.

UK Government statistics show that the number of trusts making Self-Assessment tax returns has reduced 14% since 2016.

The Finance Act 2006 included a 20% Inheritance Tax (IHT) charge on assets over £325,000. This makes onshore trusts less tax-efficient for High Net Worth Individuals, and many have explored alternative wealth planning structures.

One notable alternative is the Family Investment Company (FIC), which Winckworth Sherwood private wealth partner Tim Snaith suggests has been “badged as the modern version of the trust.” He explains it as a “private limited company with differing share classes” where the “concept of the limited share classes emulate a trust.”

Instead of a settlor placing their assets into a trust and appointing trustees, cash is placed into the company, untaxed. The head of the family appoints the board and acts as controlling shareholder with full voting rights. Shares without voting rights are then distributed to the younger family members, meaning dividends can be paid on their shares at the board’s discretion. The “magic” to a successful FIC, according to another private wealth lawyer, is “getting the right articles and shareholder agreements. It is a tag-team exercise between corporate and private client.”

FICs have additional benefits for business-minded clients. Snaith suggests that entrepreneurial clients have greater familiarity with the corporate structure compared with a trust. “The arrangements for trusts are quite alien for people,” he says; “but, for entrepreneurial clients, a company structure is their food and drink; they’re comfortable with compliance within a corporate structure.”

FICs can also become useful vehicles for succession planning, particularly for passing down control of the family business. A patriarch or matriarch who wants to involve their children in the family business can dangle the carrot of future dividends in front of them while they familiarise themselves with the business structure. An industry insider reports that “we do see a lot of FICs from people who want an alternative for getting their children involved as part of an investment strategy.”

FICs aren’t necessarily a panacea for clients looking to find an alternative to the trust, though, and there are potential downsides. Snaith highlights the requirement to file annual accounts and Corporation Tax returns as a downside of FIC structures when compared with trusts.

These requirements make FICs potentially expensive to establish, and require a level of dedication to the running of the company. Another practitioner suggests that “a FIC is only worth doing if you are invested in operating that company structure. If you are only doing it as a tax saving exercise, then it can end up as a weight on everyone’s shoulders.”

A poorly-run FIC also raises potential difficulties: “if you are a fiduciary and you are not managing it properly, there are criminal and civil penalties, people being struck off as directors, and that’s what scares clients off.”

The lack of FIC-related litigation may have less to do with the structure's innate advantages and more to do with the recency of its popularity. Snaith notes that, “because the popular concept of the FIC has been around for less time, and it’s only really since 2006 that their advantages have increased, they are really less than a generation old and thus the issues relating to the death of the heads of the families haven’t begun to come up regularly.” If a FIC breaks down due to a family disagreement, the parties could face complex and costly challenges specific to the corporate structuring involved.

FICs are increasing in popularity, they are clearly not a one-size, fits all solution. In specific circumstances and for the right kind of client, the FIC is clearly an attractive prospect, but whether it becomes a staple of private client work to the same extent as trusts remains yet to be seen.

HNWIs and private client practitioners will also be keeping a watchful eye on the Labour Party’s tax proposals at the next General Election: another change to the tax code like the 2006 Finance Act could have a significant effect on the efficacy of wealth structuring tools like the FIC.