19 July 2023

The Lifecycle of a Business - Setting up a Family Investment Company

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina.

On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So, First Things First…..

Setting up a Family Investment Company

Family investment companies, or “FICs” as they are commonly known, have become increasingly popular over recent years and are now widely used by wealthy individuals for succession planning purposes. They offer a number of tax advantages over trusts, and are also popular with international clients from jurisdictions that do not recognise trusts, and who may feel uncomfortable with involving a professional trustee company in their affairs.

From a legal perspective an FIC is just like any other private limited company. In April 2019 HMRC set up a unit to look into FICs and their use by wealthy families, which gave rise to concerns that HMRC was considering taxing FICs in a different manner to other companies. However, the unit was disbanded in the summer of 2021 having found no evidence that FICs were being used for tax avoidance purposes, and whilst future changes to how FICs are taxed and regulated cannot be ruled out, for the time being at least it seems that HMRC will continue to treat them in the same manner as other companies.

An FIC is simply a company that holds assets that would otherwise be held by family members personally. FICs can be used to hold a wide variety of assets, including cash, investments and property. Detailed tax advice needs to be taken before an FIC is established, but assuming the decision is made to use an FIC, set out below are some of their typical characteristics.

  • Funding the FIC - FICs can be funded either by way of shareholder loan or equity, but probably the most popular way is by using redeemable shares. The advantage of this is that it allows the individual setting up the FIC to extract funds from the company in a tax-efficient manner should the need arise.
  • Voting shares - In addition, the individual setting up the FIC will usually be granted voting shares. These tend not to carry any economic rights (such as rights to dividends or capital on a winding-up), but they give the individual complete control over all shareholder decisions, such as the appointment of directors, amendments to the company’s articles, and so on. The individual setting up the FIC will usually act as the company’s director (sometimes with his or her spouse acting as a second director), which gives him or her control over the company’s day-to-day decision making too, such as how funds should be invested and when dividends should be paid.
  • Alphabet shares - The final class of shares that are typically used are shares that carry economic rights but no voting rights. Each child of the individual setting up the FIC will usually be granted their own class of share (hence the term “alphabet shares”), but each of these classes tends to have identical rights. Crucially, however, having multiple classes of shares means that dividends can be declared on only one class of share at a time, thereby enabling the individual who set up the FIC to channel funds to whichever of his or her children might need them at the time (whether for a deposit to buy a house, set up a business, pay for school fees, and so on).
  • Transfers of shares - As its name suggests, an FIC is an investment company owned by, and established for the benefit of, the members of a family. As such, the articles of association of an FIC will normally contain very tight restrictions on the transfer of shares, which are designed to ensure that ownership of the company remains within the family. Typically, transfers of shares are only permitted to blood-line descendants of the individual setting up the FIC, or sometimes blood-line descendants of that individual and his or her spouse together. Great care needs to be taken in considering whether spouses of children, adopted children (and adopted grandchildren), illegitimate children (and illegitimate grandchildren), etc. should be able to hold shares – the answer will be slightly different depending on each family’s circumstances.
  • Pre-emption rights - Typically, pre-emption rights on the transfer of shares will not be included in an FIC’s articles. This is for two reasons – first, because the list of who can hold shares is usually very tightly defined (see above), and therefore there is no need to include further protection by including pre-emption rights; and secondly, because if an adult child of the individual who set up the FIC wishes to transfer their shares in the FIC to their own children (i.e. the grandchildren of the individual who set up the FIC), it wouldn’t be appropriate for other shareholders to be able to intervene and prevent that transfer by exercising pre-emption rights.

These are just some of the ways in which FICs differ from normal trading companies in the way they are set up, though there are many others and expert advice should be taken if you are considering using an FIC. Forsters has significant experience in establishing FICs, whether for nuclear families living in the UK or extended families living across the world. To find out if a family investment company is the right approach for passing on wealth to your family, please do get in touch.

Disclaimer

This note reflects the law as at 19 July 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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