When it comes to succession planning, trusts have traditionally been the go-to structure. But they come with clear drawbacks: lifetime inheritance tax charges, 10-year periodic charges, and a fair bit of complexity. For many families, a Family Investment Company (FIC) offers a more attractive alternative.
Used thoughtfully, a FIC can help you pass wealth to the next generation, retain control during your lifetime, and manage long-term tax exposure. Used badly? It just adds cost and hassle.
Let’s look at how it works in practice.
| Not sure what Family Investment Companies are? You can read our blog “What are Family Investment Companies all about?” before the following. |
The inheritance tax advantage
The main driver for most succession planning with FICs is inheritance tax (IHT).
Assets held personally are exposed to IHT at 40% on death. But shares in a FIC can be gifted to children or grandchildren as a potentially exempt transfer. Survive seven years, and the value passes outside your estate, with no upfront charge.
That’s a significant advantage over discretionary trusts, where lifetime transfers above the nil-rate band trigger an immediate 20% IHT charge, plus ongoing 10-year and exit charges.
For families with wealth well above the nil-rate band, FICs offer a more scalable approach to succession planning.
How a typical FIC structure works
While every FIC is bespoke, a common setup looks like this:
- Parents introduce funds via a loan or preference shares – this isn’t a transfer of value for IHT purposes and can usually be repaid tax-free later
- Parents hold voting shares – giving them control at shareholder and board level
- Children hold non-voting growth shares – these carry the future capital value and potentially dividend rights
Provided the parents have no beneficial entitlement to those growth shares, the value passes out of their estate after seven years, while control is retained. That’s the magic of the structure.
Control and governance
For succession planning to work, governance matters. Parents are usually appointed as directors, allowing them to control:
- Investment strategy
- When and whether dividends are paid
- Who can become a shareholder
The company’s articles of association and shareholders’ agreement are critical. These typically restrict share ownership to family members, prevent spouses owning shares (important on divorce), and deal with death, incapacity, and share transfers.
This framework is what turns a FIC from a tax device into a genuine long-term family structure.
Tax inside vs tax outside
Investment returns inside the company are taxed at corporation tax rates, currently up to 25%; most dividends received are exempt, and interest and management costs are deductible. That’s often more efficient than personal ownership, especially for higher-rate taxpayers.
But tax efficiency inside doesn’t mean tax-free outside. When shareholders extract value – through dividends, salaries, or capital distributions – tax applies. That’s why FICs work best for long-term accumulation, not regular income extraction.
| Accountant Tip! Most FICs prepare accounts under FRS 102, which can introduce fair‑value accounting and, in some cases, tax on unrealised movements. This is an area where technical advice is important, particularly for debt instruments or foreign‑currency loans, which can lead to volatile taxable results without corresponding cash flows. |
The pros and cons of FICs
While we’ve covered a lot of the pros, here’s a simple list to help you compare the advantages and drawbacks of a Family Investment Company.
| Pros | Cons |
| pass significant value to the next generation without an upfront IHT charge;allow parents to retain control during their lifetime;provide a more efficient environment for holding growth assets;offer greater flexibility than trustees may have; andprotect family wealth through carefully drafted constitutional documents. | higher setup costs and ongoing administration;reliance on tax law that may change over time;potential capital gains tax and stamp duty when existing assets are introduced; anda second layer of tax when profits are extracted personally. They are rarely appropriate where assets are needed to fund day‑to‑day living expenses. |
When a FIC isn’t the right answer
For all their advantages, FICs aren’t suitable for everyone. You should pause if:
- Simplicity is your overriding objective
- You need regular income to fund day-to-day living
- Your assets qualify for personal reliefs that would be lost inside a company
- The sums involved don’t justify the setup and running costs
In many cases, the real question isn’t “FIC or trust?”; it’s how different structures can be combined and reviewed over time as circumstances change.
So what should you takeaway from this?
Family Investment Companies aren’t tax tricks. They’re long-term ownership structures. When aligned with your family’s objectives, circumstances, and time horizon, they can work extremely well for succession planning. However, when adopted because they are fashionable, they often disappoint!
Want to explore whether a FIC could help with your succession planning? Get in touch. We’d be happy to discuss this and other options that may be best for your needs. |
