Succession Strategies: Family Investment Companies

Monday 29 July 2019

If you have a family-owned business and are in the process of succession planning, you should consider Family Investment Companies (FIC) as a means to hand over the benefit of your business, or property portfolio, to the next generation.

Advantages of Family Investment Companies

Incorporated to act as the holder of your family’s assets, one benefit of a FIC is that the share structures are very flexible because different classes of Shares can be assigned different rights. This means that control of the business can be maintained by appropriate family members, whilst others can enjoy income and capital benefits.

For example, a company may decide to assign all rights relating to voting and decision making to A Shares, and all rights to receive dividends to B Shares with returns on capital split between the two.

As a result, the A shareholders (often the parents) would be able to appoint themselves as directors and control the day to day running of the company and its business for the benefit of the B shareholders (usually their children).

Preference Shares may also be used, which allow for a fixed dividend being paid out of the profits of the FIC, but are often non-voting. These can be used to give monetary benefits (for example a retirement income) to the holders of the Preference Shares, but restrict their control over the future development and management of the company.

An FIC may also be advantageous if the parents hold Redeemable Shares in the company as a means to fund their retirement, or ‘cash out’ of the family business.

Redeemable Shares allow the holders to slowly redeem their shares for the monetary value of the shares and, whilst doing so, reduce their proportionate shareholding in favour of their children whilst transferring control to the next generation.

As their shareholding reduces so do the assets that they hold, which can also provide many Inheritance Tax (IHT) benefits. At the same time, the shares must be redeemed from the income and reserves of the company, which means that the children can essentially buy their parents’ interest in the family business without taking on significant third party debt to fund this.

Protecting your children’s future interests

Often parents handing over a family business (which they have devoted their lives to building for the benefit of their children and grandchildren) have concerns in relation to the future potential failed marriage/s of their children, and the consequential effect on the family’s business.

A FIC is a useful tool in this event because it’s Articles of Association (and potentially a Shareholders’ Agreement) can stipulate, for example, how the company is run and restrict the onward transmission of shares in a divorce situation.

Disadvantages of Family Investment Companies

As with any company, a FIC will have directors.

Where the family business has previously been unincorporated, this might be considered an onerous requirement. “With great power comes great responsibility” is a popular and appropriate motto.

Although directors have the power to make all of the day to day decisions they also have duties to, amongst other things, act in the best interests of the company and file necessary documents at Companies House (including Confirmation Statements and Accounts).

This is a massive responsibility and directors can face legal consequences if they fail to comply with their duties and obligations (for more information on the duties of directors, please click here).

Another disadvantage in establishing a FIC may (though not necessarily) include the need to pay Stamp Duty on the transfer of Shares, as well as Capital Gains Tax.

In light of this, tax benefits need to be weighed up against tax and cost detriments.

Limited v Unlimited

A FIC can either be a limited or unlimited company.

As with all companies (trading or not) a limited company does just that; and limits the liability of its owners by the capital amount originally invested or guaranteed.

Should an unlimited structure be chosen, the owners risk facing unlimited liability for any debts should something go wrong and the company is wound-up.

The decision on which structure to use should be discussed with both your legal and financial advisers, who will be able to provide guidance on risks, rewards, and the most appropriate structure for you and your family.

Overall, FICs are increasingly being adopted as a sensible approach to succession planning and should not be overlooked as an option.

For more information about FICs, please contact a member of our Corporate team today.