Family Investment Companies: a guide

Family Investment Companies (FICs) have become increasingly popular as a tool for inheritance tax (IHT) planning and wealth structuring, particularly among high-net-worth individuals.

This guide explains how FICs work, their advantages and disadvantages and where FICs fit among the available options for families looking to pass on wealth tax-efficiently.

What is a Family Investment Company?

Many families want to pass on wealth efficiently, but without giving up control too early or making irreversible gifts. FICs have emerged as one way to balance those competing aims.

A FIC is typically a UK-resident private limited company whose shareholders are family members. It is structured with different classes of shares to separate control and financial benefit. For example, parents may retain voting shares to maintain control, while children hold shares that entitle them to income and capital. This separation of control and value is a defining feature of a FIC’s flexibility.

Why use a Family Investment Company?

Understanding how a FIC works is helpful, but the real question is when it makes sense to make use of one.

FICs are particularly attractive for clients with surplus funds, typically £2m or more, who wish to pass on wealth in a structured and tax-efficient way. They are often used where families want to plan ahead but are not yet comfortable making outright gifts.

This can be especially relevant where intended beneficiaries are young, lack financial maturity, or where parents want to retain oversight of how assets are invested and distributed.

In essence, a FIC allows families to begin passing wealth to the next generation, while retaining control over how and when that wealth is accessed.

Advantages of a Family Investment Company 

For families considering a FIC, the appeal comes down to three driving factors: IHT planning, control and long-term flexibility.

One of the main advantages of a FIC is that there is no immediate IHT charge when gifting shares. The gift is treated as a potentially exempt transfer and will fall outside the donor’s estate if they survive for seven years.

FICs also avoid the 20% lifetime IHT charge that applies to discretionary trusts for transfers above the nil-rate band of £325,000. This can make them particularly attractive where significant sums are involved.

A FIC can be funded by a loan, allowing the donor to retain access to capital while transferring future growth to the company. Over time, this shifts value out of the estate without the need for irrevocable gifts.

Disadvantages of a Family Investment Company

The advantages of a FIC comes with trade-offs and FICs are not suitable in every situation – FICs are not without their drawbacks.  

Profits are subject to corporation tax and any distributions are taxed again as income, leading to a degree of double taxation. Overall efficiency depends heavily on the underlying investments and the tax position of each shareholder.

If non-cash assets are transferred into the FIC, Capital Gains Tax (CGT) or stamp duty land tax may apply. Unlike trusts, FICs do not benefit from an annual CGT allowance. There are also ongoing compliance and reporting requirements, which can increase administrative costs.

Complex share structures often require specialist legal and valuation advice. Ongoing costs for legal, accounting and investment management services can be significant. For international families, additional tax considerations may arise depending on the residency of directors and shareholders.

Family Investment Company vs. trust

Trusts have traditionally been used to pass down family wealth, but changes introduced by the Finance Act 2006 have made them less tax-efficient in many cases. New trusts are subject to the relevant property regime, which includes a 20% entry charge on transfers above the nil-rate band, 10-year anniversary charges and exit charges.

FICs do not face these charges and can be more tax-efficient, particularly when funded with cash. They also allow the donor to retain control over investments and income flows. However, trusts may still be appropriate where assets qualify for reliefs such as business property relief or agricultural property relief. As this is a specialist area, it is crucial to seek professional advice to understand the best option for you or your family’s situation. 

Setting up a FIC and tax considerations

Setting up a FIC involves incorporating a private company and drafting bespoke articles of association to reflect the desired control and ownership structure. Different share classes are created to allocate voting rights and financial benefits appropriately.

Professional legal and tax advice is essential to ensure the structure meets the family’s objectives and complies with relevant regulations.

FICs pay corporation tax on profits, currently up to 25%. UK dividend income is usually exempt and expenses such as investment management fees are deductible. Shareholders only pay income tax when profits are distributed. If profits are retained within the FIC, no further tax is due until distribution, giving families greater control over the timing of tax liabilities.

The tax position of each shareholder is important. Distributions are taxed at the recipient’s marginal income tax rate, which can be as high as 39.35%. Planning income flows carefully can help maximise tax efficiency. In some cases, purchasing shares back from shareholders can be a tax-efficient way to extract capital.

Can a FIC buy property

Yes, a FIC can buy property. However, the tax implications depend on the type of property and how it is used. Residential property held in a FIC may be subject to the Annual Tax on Enveloped Dwellings and higher rates of stamp duty land tax.

By contrast, investment portfolios - particularly those focused on UK equities - are generally more tax-efficient within a FIC structure.

A powerful tool for you?

A FIC can be a powerful tool for IHT mitigation and wealth structuring, offering control, flexibility and potential tax advantages. However, it is not suitable for everyone. The costs, complexity and ongoing compliance requirements must be carefully considered.

There are many estate planning strategies available and no one-size-fits-all solution. It is essential to define objectives clearly and seek professional financial, legal and tax advice to determine the most appropriate structure for each family.