When it comes to succession planning, families want the best of both worlds: preserving wealth for future generations, while staying in control of key decisions. Increasingly, families are turning to Family Investment Companies (FICs) as an effective solution.
This article explores what makes a Family Investment Company work, why families choose them, and the protective provisions that help ensure wealth remains within the family for generations to come.
What is a Family Investment Company?
A Family Investment Company is a private company, usually limited by shares, established to hold and grow family wealth. Rather than transferring assets directly to children or using a traditional trust structure, parents (or grandparents) establish a company and contribute funds through gifts or loans. Those funds can then be invested, typically in property, shares, or other assets, for the long-term benefit of the family.
The true power of a FIC lies in its structure. Through carefully designed share classes and constitutional documents, parents can retain influence over major decisions while allowing their children to benefit from the growth in value.
Why use a Family Investment Company?
Some of the main advantages are:
- Control vs. benefit – Parents may pass to their children a large proportion of the economic benefit, while retaining veto rights on key decisions.
- Flexibility – Different share classes can be created to separate capital rights, income rights, and voting rights.
- Succession planning – Shares can be gifted gradually to children over time, without immediately handing over full control or creating complex trust arrangements.
- Potential tax advantages – FICs can be structured in ways that are more efficient than direct ownership or trusts, but specialist tax advice is essential as the right approach depends heavily on individual circumstances.
Key provisions to protect family wealth
When setting up a Family Investment Company, the articles of association and shareholders’ agreement should be carefully drafted to address the family’s specific concerns. The most important provisions typically relate to death, divorce, and decision-making.
- Voting rights and reserved matters – Parents often retain veto rights that give them a say over major decisions, such as changing the articles, appointing or removing directors, or significant investments and disposals.
- Permitted vs. restricted transfers – The documents can set clear rules about how shares may be passed on. For example, permitted transfers might include gifts to immediate family, such as gifts from parents to children during lifetime or on death. In contrast, any transfer to non-family members (or sales to third parties) would normally require consent, helping to ensure ownership stays in the family.
- Compulsory transfer events – Events such as death, bankruptcy, mental incapacity or divorce could trigger a compulsory transfer of shares, helping to prevent value moving outside the family. The detail depends on each family’s wishes and circumstances.
- Pre-emption rights – Giving existing shareholders the right of first refusal if another family member wishes to sell.
- Drag and tag rights – Ensuring that if the company is ever sold, minority family shareholders are either protected (tag) or required to sell alongside the majority (drag).
Points to watch out for
- Tax – FICs can be highly tax-efficient, but the tax landscape is complex and constantly evolving. There can be unexpected tax charges if money is taken out of the company in the wrong way, so it’s essential to structure things carefully with input from experienced tax advisers. What works well for one family may be inappropriate for another.
- Governance – A FIC is a company like any other and must comply with all standard company law requirements: filing accounts and confirmation statements, maintaining registers, and observing company law formalities. These obligations continue for the life of the company.
- Family dynamics – A FIC is ultimately about people. It’s important to agree upfront how decisions will be made and how disputes will be resolved. The structure should support family harmony, not create division.
Is a Family Investment Company right for you?
Family Investment Companies work best where there is significant family wealth to be managed long-term, and where parents want to strike a balance between retaining control and passing value to the next generation. With the right planning, they can be a powerful tool to preserve wealth and keep it firmly within the family.
At Murrells, we work closely with families and their tax advisers to design and draft the bespoke constitutional documents that make FICs effective in practice. If you are considering how best to structure family wealth for the next generation, please contact Henry Maples or Luke Smith in our corporate team, who would be delighted to discuss whether a Family Investment Company might be right for you.
