What are Family Investment Companies all about?
When structuring family wealth and planning for succession, there is no single solution that fits every family. Trusts have traditionally played a central role, but they come with clear drawbacks – most notably lifetime inheritance tax charges and 10 year periodic charges.
A Family Investment Company (FIC) can be an effective alternative. In simple terms, this is about using a company as the vehicle through which wealth is held, invested and gradually passed to the next generation, often with greater control, clarity and tax efficiency than a Trust.
As ever, the value lies not in the label, but in whether the structure fits your objectives.
What is a Family Investment Company?
A Family Investment Company is simply a private limited company (or, in some cases, an unlimited company) established to hold investments for a family.
There is nothing exotic about the entity itself. The planning is in the share capital and control mechanics.
Most FICs are set up as limited companies, but unlimited companies can be attractive where privacy is important, as they are not required to file accounts at Companies House.
For internationally mobile families, it may be appropriate to incorporate offshore while keeping UK tax residence initially, with the flexibility to move the company’s residence in future. This can have inheritance tax advantages, but exit charges and long-term planning must be considered carefully.
Setting up a Family Investment Company
The key decisions are strategic, not administrative.
1. Jurisdiction and company type
For UK based families, this is usually a UK company. International families may require a different approach.
2. Share capital structure
This is where a FIC earns its keep. The share classes can be designed so that:
- control sits with the parents
- economic growth accrues to children or future generations
Alphabet shares, growth shares and bespoke rights allow flexibility, albeit within a tighter framework than a discretionary trust.
Shareholders own the company, but directors control daytoday decisions. That distinction is often helpful.
3. Funding the company
A FIC can be funded through share capital, loans, or a mix of both. Loans provide flexibility in:
- extracting value later, but care is needed if shares are gifted, to avoid triggering
- antiavoidance rules.
Tax considerations
Inheritance tax
Gifting shares in a FIC is generally a potentially exempt transfer. Provided the donor survives seven years, the value passes outside the estate for IHT purposes. By contrast, gifts into a trust can trigger an immediate 20% IHT charge (above the available nil rate band), with further 10year and exit charges thereafter.
As always, capital gains tax and stamp duty must be considered alongside IHT.
Corporate taxation vs personal taxation
One of the attractions of a FIC is that investment returns are taxed within a corporate environment, which is often more favourable than personal taxation.
- Corporation tax currently applies at 25% for close investment holding companies
- This compares with personal income tax rates of up to 45% (or higher for Scottish taxpayers)
Lower tax leakage means more capital available for reinvestment.
Dividends
Most dividends received by UK companies – including many foreign dividends – are exempt from corporation tax.
Individuals, by contrast, are taxed on dividend income personally.
Capital gains
Capital gains realised within a FIC are taxed at the corporation tax rate.
Individuals disposing of assets may pay CGT at 18% or 24%, depending on the asset and their income position. Where a FIC disposes of shares in a qualifying subsidiary, the Substantial Shareholdings Exemption may apply, exempting the gain entirely – but the conditions must be met.
Interest and expenses
A FIC can usually deduct:
- interest on loans used for business purposes
- management and running expenses
These reliefs are not generally available to individual investors.
Extracting profits
Tax efficiency on the way in does not remove tax on the way out.
Extracting value from a FIC may involve:
- dividends
- salaries
- capital distributions
Each route has its own tax profile. For this reason, FICs are normally best suited to long-term planning, where wealth is allowed to compound rather than being extracted and spent annually.
When a Family Investment Company may not be appropriate
A FIC is not a universal solution.
It may be unsuitable where:
- residential property is occupied by family members and ATED applies
- investments qualify for personal reliefs such as BADR, BPR or EIS/SEIS, which may be lost in a company
- simplicity and short-term income extraction are the priority
The question is not whether a FIC works in theory, but whether it works for your family.
Final thought
Family Investment Companies are powerful planning tools when used correctly. Like trusts, they are not plug and play solutions. The value lies in thoughtful design, disciplined use and regular review.
If you are considering whether a FIC has a role in your family’s planning, we would be happy to discuss this with you.
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