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  • Katherine Bullock

Onshore to Offshore: the anatomy of an FIC

Whilst it is true that Family Investment Companies (FICs) are simply companies used to hold investments and there are no special tax or other rules that apply to them, the adaptations that are often made to fit a particular purpose mean that they can present some unique and unexpected challenges.

Typically an onshore FIC is structured as a UK incorporated company managed and controlled in the UK. It is therefore a non-trading company subject to UK taxes. Being an investment company, it can deduct fees for fund management. Since it will typically be owned and managed by family shareholder, the additional close company rules are likely to apply if it is UK-tax resident, but otherwise no special company law rules or special tax rules apply.

An FIC used for estate planning purposes is essentially designed to replicate the mechanisms of a UK trust but without the IHT disadvantages that now apply to trusts. Shares typically confer voting power, the right to receive dividends and the right to the underlying capital. The ability to issue and transfer shares with only one or two of these properties gives FICs their flexibility as an estate planning tool. An FIC, if properly structured, can allow control over assets to be retained by the founder, while some or all of their value is passed on to the next generation in an IHT-efficient manner. It can provide access to income and capital and it can also accumulate income and hold capital for the future.

"...the greatest care and precision is required to navigate the plethora of tax avoidance rules that can be inadvertently breached..."

A corporate structure is also familiar to most people. The roles of shareholders and directors are well-understood internationally and this can permit more autonomy in their operation. An entrepreneur may feel more confident establishing an FIC than a family trust which can seem arcane and inscrutable even to those who might regularly encounter them!

That is not to say that the traditional trust arrangement has lost all its appeal. The flexibility of the trust and its well-developed applications specifically for the transfer of wealth across generations cannot be denied. FICs, for all their tax benefits, cannot benefit a discretionary class, or an unborn shareholder. Furthermore, FICs must contend with a relative lack of privacy, since many of the critical documents must be filed publicly, releasing significant information about the shareholders and persons of critical control, the operation of the company and the assets that it holds. This can be mitigated to some degree by making the company one of unlimited liability and by carefully considering what must be included in the Articles of Association and what should be kept private in a shareholder’s agreement. However the loss of unlimited liability removes a key advantage of a corporate structure, particularly if the FIC is engaged in certain areas such as let property. The most successful FICs will therefore utilise both a company and a trust.

All of this sounds straightforward but it is here that the greatest care and precision is required to navigate the plethora of tax avoidance rules that can be inadvertently breached.

In very simple terms, an FIC is formed by a transfer of cash or other assets in exchange for the issued shares. No tax issues arise on a cash subscription for shares at par or premium but the transfer of assets by way of gift is a disposal for market value and so may give rise to a capital gain, subject to reliefs. The purchase price can be left outstanding to allow tax free extraction and to allow flexible and tax efficient extraction of capital by the founder, FICs are often funded by a combination of share capital or debt, often interest-free and repayable on demand.

The next potential difficulty is how to structure the shares. Different classes of shares can carry different votes, rights to income and capital. Different classes may be held by different persons, such as the founder, the founder’s children, and a family trust and these are often used to facilitate different levels of income payments to different family members.

Shares in the FIC may be gifted to the founder’s children or other family members on incorporation or alternatively cash may be given to the children to enable them to subscribe for shares. Any shares retained by the founder or by adult recipients will form part of the relevant individual’s estate for IHT purposes, but that value may be discounted if it is a minority interest. How shares and loans are structured requires careful consideration from a tax perspective.

Day to day control of the investment and distribution policy of the company rests with the directors of the company and not the shareholders. The power of shareholders is mainly to remove directors, change the Articles and bring the company to an end. The founder may therefore retain sufficient control over the company as a director or by controlling the appointment of directors. These powers might be held in trust to protect against the dismissal and appointment of new directors and to authorise a disposal of shares or a change in the share structure. Such rights might also be retained by the founder until death or preserved for the founder as a beneficiary, trustee, or protector of the trust. Care is needed with the valuation of such shares’ rights, particularly where CGT or an IHT chargeable lifetime transfer may arise. The cautious founder might retain voting rights or create and gift only non-voting shares. Either strategy will dilute the IHT benefit of the FIC structure as additional value attaches to the voting shares.

In short FICs offer huge flexibility. That flexibility can be their greatest advantage and disadvantage. The important lesson for advisers is to prepare carefully and to review constantly so that you remain aware of any potential complications and can address them before an HMRC nudge letter does!


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