Family investment companies – crossing three generations


FAMILY INVESTMENT COMPANIES – CROSSING THREE GENERATIONS


We have been asked to assist with many Family Investment Companies (FICs). They are becoming increasingly popular as a means of passing wealth from one generation to the next, while providing a level of control over who may become entitled to the funds and when they may do so. Moreover this can be achieved in a tax-efficient way, without the perceived complexities and costs of a trust.


We previously looked at a ‘two-generation’ FIC, with parents establishing a FIC for their infant or minor children. The parents hold voting ‘A’ shares, have the right to appoint directors, but have no right to income or any return of capital i.e. the ‘A’ shares are ‘Control Shares’. The children’s ‘B’ shares have no control or voting rights but may receive dividends and returns of capital (i.e. the ‘B’ shares are ‘Value Shares’). But what happens if grandparents wanted to establish a FIC, that effectively spans three generations? Can the FIC arrangement still work? What needs to be considered?


Establishing a FIC over three generations


The grandparents in the diagram have two sons and one daughter and three grandchildren. One son has no children yet.


The points that we would typically discuss and advise on are the following:

  • Whether the grandparents will hold controlling A shares; care must be taken (and tax advice is essential here) to ensure there is no reservation of benefit which may bring the A shares into the grandparents’ estate.
  • How a loan from the grandparents to the FIC will be structured, to ensure it can fall outside the grandparents’ estate on death, and the potential tax impact on the FIC. It may be possible to provide that it is repayable on demand (but is never actually demanded in their lifetime). On death the executors waive any right of repayment.
  • How the shares are to be transferred on the death of one or both grandparents - generally the A shares would pass to the survivor on death and on the death of both grandparents would pass to the (adult) children.
  • Should the children hold A shares? Typically they would but there may be sensitivity about whether all the children would have a say on all the grandchildren’s shares; it may be appropriate to limit decision-making in respect of each grandchild’s shares to the grandchild’s parents and grandparents.
  • How the shareholdings should be structured – and should the children hold Value Shares? After all the grandparents may wish to provide for their children in their later life ahead of the grandchildren – particularly where there are unmarried children and the grandparents wish to provide for them. However care must be taken here about value transfer – an FIC works best for IHT purposes where long-term grown can be achieved outside the grandparents’ estate.
  • We generally recommend a different class of Value Share for each ‘Value Shareholder’. This provides flexibility allowing dividends to be varied between classes (e.g. to a child or grandchild with greater financial need) and potentially allows for an ‘exit’ for a Value Shareholder by the FIC buying back a particular class of share if it is in a position to do so.
  • How to provide for future grandchildren; usually this is easy – a new class of Value Shares is created at the relevant time.
  • Should the FIC assets be divided by number of grandchildren or children? This can obviously be contentious where one or more children have larger families than others. It is really a decision for the grandparents, though generally we find dividing the FIC’s assets by number of grandchildren the preferred approach.
  • Generally, A shares will only be held by parents or grandparents, but it may be appropriate for the grandchild to acquire (by conversion or a call option) A shares when they come of age at 18 or 21 or when they are considered sufficiently responsible to become an A shareholder – especially if the ultimate intention is for the grandchildren to become involved in managing the FIC.
  • Whether the grandchildren should be shareholders in their own right; although there is nothing prohibiting minors holding shares, the shares are often held in a trust by the parents. However as the shares in a FIC held by grandchildren are usually non-voting and created for the purposes of long-term growth, there may be little issue with the shares being registered in the grandchildren’s names.
  • How protection can be built in to ensure that the Value Shares can be held by bloodline descendants only. From the grandparents’ perspective this is an essential means of ensuring family wealth stays in the family and cannot pass ‘sideways’ to their children’s or grandchildren’s spouse / partner / step-children or otherwise.
  • What can be done to ensure one of the children does not dominate the decision-making across the FIC – this may particularly be the case where one of the children has business experience and strong views about what the FIC should or should not do. If from childhood onwards that person has held sway over his or her siblings, it may not create the equal outcome the grandparents hoped for. Provisions can be introduced in the articles to mitigate that.
Succession planning for Family Trading Company alongside a FIC

While FICs are typically used to build wealth in the hands of the next generation, the reality is often that the family’s wealth arises from a family trading company (FTC) or group which may have been formed by the grandparents or their predecessors. Our next article will consider how a FIC may fit alongside a FTC where the wealth planning is not just about forming an FIC so much as managing succession.

 


About the author: Anthony Young is a highly experience solicitor and Head of Corporate Law with Jordans Corporate Law Limited, a law firm authorised and regulated by the Solicitors Regulation Authority no 605152.

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