Emma Brown Tax Transactions Partner

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Emma Brown

Tax Transactions Partner

Emma leads our transaction tax team. She joined Wilson Wright in 2014 and became a partner in April 2019.

Emma has a depth of experience of advising entrepreneurs and owner-managed businesses and across a wide range of complex taxation matters relating to both personal and corporate tax. Her expertise includes of corporate reconstructions, M&A, EMI and EIS.

Her attention to detail and her ability to explain complex technical matters in a way that people understand, puts clients at ease. She delivers pragmatic commercial advice and ensures that clients’ best interests are preserved at all times.

Emma sits on the global tax committee of DFK International, reinforcing her strong international links on cross border transactions, and she was a finalist in the 2019 for a prestigious Tolley’s Taxation Award.

Emma is a member of Chartered Institute of Taxation and the EISA.

7 Jul 2023

What is a Family Investment Company (“FIC”)?

A FIC is a normal UK limited company whose shares are normally held by family members and family trusts.

FICs are generally created to hold the wealth of a family as a corporate alternative structure to a trust. A FIC is not limited in terms of the investments it can hold, which could include a range of listed investments which are typically handled by a portfolio manager; unlisted private equity investments; or any other asset such as cryptocurrency or real estate, for example. The choice is down to the preference and investment appetite of the company director.

The effective use of a FIC will typically see income being generated in a lower corporate tax environment meaning that additional value can be reinvested into the investment portfolio allowing it to grow more quickly. In addition, it may be possible to pass some value out of the estate of parents and distribute or transfer this out to or for the benefit of the wider family members.

How could the shares in a FIC be held?

Shares in a company convey three different types of rights:

• the right to vote on company affairs (including, crucially, the ability to appoint directors);
• the right to receive dividends; and
• the right to receive assets on the winding up of the company.

By using different share classes that separate these rights, it is possible to put economic rights (the right to receive dividends and assets on winding up) in the hands of some individuals, and control (the right to vote on company affairs) in the hands of other individuals. Typically, voting shares are allocated to the founders of the FIC, with dividend and/or capital rights being allocated to the founders’ children, grandchildren or other family members.

Furthermore, those individuals with economic rights can be allocated individual share classes. This gives the company the ability to make distributions to a specific individual, without declaring dividends across a whole share class and to all the holders of that share class. This gives a great deal of control over the family’s wealth.

What are the advantages of a FIC?

The most significant advantage is that almost all dividends (including dividends paid from most foreign companies) are tax-free when received by a FIC (they are exempt from corporation tax). The same investments if held by an individual would be immediately taxable in the year of receipt at 33.75% for higher rate taxpayers or 39.35% for additional rate taxpayers. The FIC can therefore be very effective as a mechanism to efficiently grow family wealth, potentially tax-free, over the years.

Other forms of income, for example interest, are subject to corporation tax at 25%. Again, this represents a saving compared to the 40/45% rate of income tax paid by higher-earning individuals. 

Additionally, the management expenses of the company, including portfolio manager fees, are deductible against income for corporation tax purposes. These same fees cannot be deducted by an individual declaring their income through Self-Assessment.

Finally, if the FIC is used to hold investment properties, a full deduction is allowed against corporation tax for any mortgage interest.

What are the possible disadvantages?

The most significant are in relation to the tax charges that can arise when funds are extracted from the company. Firstly, the FIC is liable to corporation tax on its profits (excluding most dividends) at 25%, then if a distribution is taken, the individual shareholder will be liable to income tax on the dividend. If the individual receiving the dividend is a top rate taxpayer, the effective rate of tax will be 54.5% after corporation tax and dividend tax.

Secondly, any gains made on the sale of investments is taxable on FICs under corporation tax at 25%, which is higher than the current rate of capital gains tax payable by individuals on most assets, such as shares (20%). However, it is still slightly lower than the capital gains tax payable by individuals on residential properties (28%). Companies also do not have access to the annual exempt amount of £6,000 which is available to individuals, although the impact of this is fairly minimal, particularly as the annual exemption is set to reduce to £3,000. However, in certain circumstances where significant shareholdings are held in investments the tax may be reduced to 0%.

Finally, as with any structure, there are tax and advisory costs related to the initial setup as well as ongoing costs to bear in mind. A company will require annual accounts and a corporation tax return and the fees for this should be considered relative to the potential benefits that the FIC can offer. In addition, anti-avoidance legislation will also need to be considered.

Taxation of a FIC

A FIC is a normal, UK company that is liable to corporation tax on its worldwide profits (that is, both income and gains). The rate of corporation tax is currently 25% and all chargeable income and capital gains will be taxed at this main rate. In calculating the amount of income or capital gains which is subject to tax the costs incurred by the company, along with any reliefs that might be available should be considered. As explained above, most dividend income will be exempt from corporation tax and management charges (such as accountancy fees), and can generally be deducted from a company’s taxable income to reduce its corporation tax liability.

Where a FIC disposes of more than a 10% interest in an unquoted, trading company investment that has been held for more than 12 months, the capital gain generated on the shares may qualify for the substantial shareholding exemption resulting in the capital gains being exempt from corporation tax.

The above is a very brief and simplified overview of the taxation of a company. Care will need to be taken when dealing with any losses incurred, as well as the taxation of loans and derivatives (which have their own, special rules).

Filing Obligations

A FIC is required to file certain documents with Companies House, including annual accounts, lists of persons with control of the company, the number of shares in issue, the directors, charges over company assets and when shares are issued. All of these documents are in the public domain and are freely and easily available online.

A company is also required to submit full accounts to HMRC, together with an annual corporation tax return.

Will a FIC be right for me?

No two families are the same and a FIC will not be the right solution for everyone. Advice should be sought from a qualified professional to determine the best way forward for you and your family.

If you would like to discuss this further, please get in touch with our expert, Emma Brown.