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Discovering that you have significant wealth to leave to your relatives may not be a bad situation.
However, this presents challenges, as ensuring that you can pass on as much of your wealth as possible is easier said than done.
Depending on the size of your estate, the method you choose to do so could vary dramatically.
One option is to create a family investment company to manage and transmit wealth to the next generation.
This is Money sheds light on whether setting up a family investment firm could be the right move to protect your family’s legacy.
Professional help: Experts advise seeking both legal and financial advice when setting up a FIC
What is a family investment company?
A family investment company, or FIC, is a limited liability company created for the purpose of holding and managing a family’s wealth. This provides an effective method for wealthy individuals to grow and manage their money, as well as pass it on to the next generation.
Family members usually become shareholders in the company, in order to give them a stake in the assets.
Generally, family investment firms come into play when someone has significantly more wealth than they need to fund their standard of living.
David Denton, technical consultant at Quilter Cheviot, says: ‘FICs are companies set up to hold investments and enable those who establish them, often known as founders, to facilitate the controlled gifting of their wealth for IHT planning purposes.
‘This is in contrast to non-FIC companies, which have commercial rather than investment purposes.’
The company’s shares are controlled by family members, so they can have control over the investment decisions that are made. The founders of the company usually take control, while the beneficiaries own shares with rights to the capital.
“These are typically set up by advisors, accountants and lawyers to tailor the company’s articles of incorporation to the client’s needs and objectives,” says Billy Ambler, financial advisor at Flying Colours.
Should you choose a family office, a family investment firm or a family trust?
While family offices, FICS and family trusts are all used to manage a family’s wealth, each has different approaches and objectives.
Family offices are private wealth management companies that offer a range of services tailored to the individual or family for which they are created.
Control: Billy Ambler says using different share classes can help founders manage their assets while their children benefit
‘Family offices are collectives of legal, tax and other professionals who have the expertise to advise the wealthiest families, and can use FICs as part of a wealth management strategy for the family or families they advise,’ Denton said.
Family offices are often used to address more day-to-day financial needs than long-term planning.
Family trusts, on the other hand, offer an alternative to FICs and are used by wealthy individuals to manage assets for their beneficiaries.
Tax changes mean that trusts are no longer an effective way to reduce tax liabilities. However, they are a useful tool to ensure you have control over how your assets are used and managed.
David Goodfellow, head of estate planning at Canaccord Genuity, says: “Trusts can be created for estate planning, asset protection and charitable giving. They can also be beneficial from a tax planning perspective.”
However, Denton warned: “Because of the potentially negative tax consequences of funding a discretionary family trust for more than £325,000, such arrangements are typically used by those with more modest wealth than those employing a FIC.”
How much money do I need?
There is no minimum requirement for setting up a FIC. However, the costs involved mean that unless you have a large net worth, using a FIC will not be worth the benefits you will gain.
Setting up a FIC will likely cost at least £5,000, with additional costs added depending on the complexity of the share classes and the amount of property being transferred.
FICs also have annual administration fees, which will further drain your wealth. However, if your wealth is large, these costs are insignificant compared to the amount you can save in inheritance tax.
According to accountancy firm Gravita, this figure could rise to £800,000 on a £2m transfer.
However, while the minimum recommended amount is not set in stone, David Denton of Quilter Cheviot recommends having at least £3 million.
Similarly, Goodfellow told This is Money: ‘At Canaccord we have FICs of around £3m. There is no minimum setup amount, but given the costs associated with setting up and maintaining a FIC, you would need at least a few million.
‘They are suitable for high net worth individuals or families with substantial assets who wish to manage and protect their wealth over generations. They may also be suitable for families who own businesses and wish to maintain control and ensure a smooth succession.’
There is no upper limit.
How can a FIC help with inheritance tax planning?
Creating a FIC can be an effective method to avoid the impact of inheritance tax, making use of the seven-year gift rule.
“Founders can then gift shares to family members. Gifting shares can help reduce the founder’s estate for inheritance tax purposes,” Goodfellow said.
Shares donated during the shareholder’s lifetime are classified as potentially exempt transfers and would therefore no longer be part of the founder’s estate and would not be subject to inheritance tax if the donor remains alive for seven years after the gift was made.
Accountability: David Goodfellow says gifting shares can help reduce the size of a founder’s estate
Goodfellow adds: “A FIC can benefit from corporate tax rates on capital gains, which are generally lower than personal capital gains tax rates. Retained earnings can be reinvested within the company, allowing for compound growth with no immediate personal tax liability.”
Typically, FICS can be set up with multiple classes of shares that can be used to provide different benefits to the founders and beneficiaries.
For example, founders will own shares that allow them to retain control over the assets while also benefiting from dividend rights to generate income.
Ambler says: ‘It could be that the children’s shares have no claim to capital or income unless approved by the parent’s share class; this would meet some requirements for maintaining control of the income and assets to which the children have access, since they would not have unlimited rights.’
Meanwhile, the beneficiary share class is likely to have equity rights, allowing their shares to grow in value with the business and eventually exit the founders’ equity after seven years.
How can I set up a FIC?
When setting up a FIC, it is important to seek financial and legal advice to ensure that the vehicle meets your family’s needs.
“It can be a complex area,” says Ambler, “so it should not be undertaken without getting the proper advice and guidance.”
Once registered and properly structured, your FIC can be funded by transferring your cash or investments.
Once the company is established, the founders must establish an investment strategy in order to ensure the growth of the FIC.
“Investment managers are employed to ensure expert long-term management, with knowledge of the vehicle’s internal taxation as well as the family’s wishes,” Denton said.
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