Family Investment Companies (FICs) have become a popular alternative to trusts in recent years. They can be an effective and flexible means of using a well-known, tried-and-tested structure of a company to control, grow and distribute wealth on a generational basis.
If you are considering establishing an FIC, as well as your Wealth Manager, we advise undertaking this complex planning alongside a lawyer and tax adviser to ensure that all angles are covered. Some of the key elements for consideration are how best to fund the FIC, the structure, and who should benefit. However, the focus of this article is to highlight several considerations when it comes to investing the underlying capital that is placed into an FIC.
Just like individuals, it is possible for an FIC to hold and invest in a wide range of different asset classes, but there are additional factors to consider when deciding the optimum investment strategy within this structure.
In some ways, investment in an FIC is simpler than on a personal basis. This is because, rather than all the various personal tax rates that we must account for, the main tax to consider in a company is corporation tax (which is increasing to 25% from April 2023).
FICs: Key investment strategy considerations
Equity allocation: income or growth?
When building an FIC investment strategy’s equity allocation, it is worth considering tilting towards income. This is because franked dividend income received by a company is not taxable. In comparison, once crystallised, gains are taxed as profit and subject to corporation tax. Therefore, the more return you can generate via dividend income, the more tax efficient that return will be.
A steady stream of income also provides optionality and in turn cash, which can be distributed to shareholders, cover costs, or be reinvested into purchasing more units.
Whilst an income tilt is optimum from a tax perspective, it’s important not to overreach in this regard. Investment funds that pay out high levels of income can also be particularly volatile in some market conditions and tend to be concentrated in certain sectors.
Collective investment funds or directly held investments?
Investment directly in individual equities or exchange traded funds within a company requires you to obtain and renew a Legal Entity Identifier (LEI). This can complicate the management and increase the cost of running the portfolio.
The investment strategies we use employ collective investment funds that, under current rules, do not require an LEI. This simplifies the ongoing administration and reduces the running costs of the FIC.
Exposure to other asset classes
Whilst there is a case for investing solely in equities, and particularly those that pay a high dividend yield, due to the risk profile and objectives of the FIC, this may not be appropriate.
Though income and gains from other asset classes such as fixed interest, alternatives, and property will typically be treated as profit and taxed at Corporation Tax rates, these other asset classes can provide downside protection, rebalancing opportunities and diversification.
Tilt rather than concentrate
Whilst there are various ways you can tilt your FIC’s investment strategy to increase tax efficiency over time, it’s important to find a balance. If you concentrate too much on tax-efficiency at the expense of a properly diversified portfolio, you might sacrifice far more in returns over time than you will make up in tax-efficiency. This would be allowing the tax tail to wag the investment dog.
For example, we allocate our equity content using a regional asset allocation model. This starts with an allocation that is in line with each region’s market capitalisation within the global equity market. We then employ a slight tilt according to the relative value of each market. As this way of allocating is central to Taylor Money’s investment philosophy, we don’t sacrifice this when building our FIC investment strategies, even if it would be more tax efficient to weight more heavily towards regions that typically pay a higher dividend income (i.e. UK vs US companies).
To conclude, establishing and funding an FIC is complex enough, so the overriding aim is to employ a straightforward, robust, rules-based strategy that can be adhered to throughout all market conditions.
The main benefit of investing capital into an FIC is the ability to either reduce, or limit, your estate’s liability to Inheritance Tax. We would argue Inheritance Tax is one of, if not, the most punitive tax rate and therefore much of the planning when establishing an FIC will be focused on this.
Here at Taylor Money, using our central philosophy as a starting point, we have developed our own range of strategies designed specifically for deployment in the investment element of a company or FIC. For more information, talk to one of our Wealth Managers on 01326 210131 or email enquiries@taylormoney.com
