A practical alternative to trusts – when used for the right reasons
A family investment company can be an attractive approach to tax and succession planning.
Family Investment Companies (FICs) have moved firmly into the mainstream of UK succession and tax planning. They are not new, nor are they artificial, but they are often misunderstood. When used thoughtfully, a FIC can be a highly effective way to pass wealth to the next generation, retain control, and manage longterm tax exposure.
Used badly, they simply add cost and complexity.
This article brings together the key elements of a FIC into a single, coherent framework and explains where they work well – and where they do not.
What is a Family Investment Company?
A Family Investment Company is simply a private company whose shareholders are family members (sometimes alongside a family trust). The company exists to hold investments, not to trade. Typical assets include share portfolios, investment property and other growth assets.
The value of a FIC does not lie in the company itself, but in:
- the share structure;
- the separation of control from value; and
- the way capital is gradually shifted to the next generation.
In essence, parents introduce capital, retain control, and allow future growth to accrue to children and grandchildren.
Why families consider FICs
The most common driver is inheritance tax (IHT).
Assets held personally form part of an individual’s estate on death and are typically exposed to IHT at 40%. By contrast, where a FIC is properly structured, the capital value of shares gifted to the next generation can fall outside the founder’s estate after seven years, with no upfront IHT charge.
This contrasts with discretionary trusts, where:
- lifetime transfers above the nilrate band generally trigger an immediate 20% IHT charge; and
- ongoing 10year and exit charges apply.
For families with significant wealth, FICs can therefore provide a more scalable alternative.
How a typical FIC is structured
While FICs are always bespoke, a common structure looks like this:
Parents introduce funds by way of a loan and/or subscription for preference shares. This is not a transfer of value for IHT purposes and can usually be repaid Tax free. Parents hold voting shares, giving control at shareholder and board level. Children (or trusts for their benefit) hold nonvoting growth shares, which carry the future capital value and, potentially, dividend rights.
Provided the parents retain no beneficial entitlement to those growth shares, the value passes out of their estate after seven years, while control is retained.
Control and governance
Parents are usually appointed as directors, allowing them to control:
- investment strategy;
- the timing and amount of dividends; and
- the admission or exit of shareholders.
The company’s articles of association and shareholders’ agreement are critical.
These documents typically:
- restrict share ownership to family members or family trusts;
- prevent spouses owning shares (important on divorce);
- deal with death, incapacity and share transfers; and
- define clearly who has income rights and who has capital rights.
This governance framework is what allows a FIC to operate as a longterm family structure rather than a shortterm tax device.
Taxation inside the company
Corporation tax
Investment profits and gains are taxed within the company at corporation tax rates (currently up to 25%). Most FICs are classed as close investment holding companies and do not benefit from the small profits rate.
While rates change over time, the corporate tax environment is often more efficient than personal ownership, particularly for higher rate taxpayers.
Capital gains
Capital gains realised by the company are subject to corporation tax. Where a FIC disposes of shares in a qualifying trading subsidiary, the Substantial Shareholdings Exemption may remove tax entirely, provided the conditions are met.
Dividends
Most dividends received by UK companies, including many overseas dividends, are exempt from corporation tax, allowing returns to roll up efficiently within the company.
Interest and expenses
Unlike individuals, a company can generally deduct:
- interest on loans used for investment purposes; and
- management and running costs.
This can be particularly attractive where investment portfolios are geared.
Accounting considerations
Most FICs prepare accounts under FRS 102, which can introduce fairvalue 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.
Tax when value is extracted
Tax efficiency inside the company does not remove tax altogether. When funds are extracted, shareholders may face:
- income tax on dividends;
- income tax and National Insurance on salaries; or
- capital gains tax on liquidation distributions.
As a result, FICs tend to work best where the objective is long-term accumulation, rather than regular personal spending.
Advantages in summary
A Family Investment Company can:
- 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; and
- protect family wealth through carefully drafted constitutional documents.
The drawbacks – and they matter
FICs are not suitable for everyone.
They involve:
- 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
- a second layer of tax when profits are extracted personally.
They are rarely appropriate where assets are needed to fund daytoday living expenses.
When a FIC may not be the right answer
You should pause if:
- simplicity is the overriding objective;
- regular income extraction is required;
- assets qualify for personal reliefs that are lost inside a company; or
- the sums involved do not justify the cost and complexity.
In many cases, the real decision is not “FIC or trust”, but how different structures can be combined and reviewed over time.
Final thought
Family Investment Companies are not tax tricks. They are long term ownership structures. When aligned with a family’s objectives, circumstances and time horizon, they can work extremely well. When adopted simply because they are fashionable, they often disappoint.
Good advice at the outset – and regular review thereafter – is essential. If you would like to explore whether a Family Investment Company has a role in your planning, we would be happy to discuss this with you.
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