For individuals and business owners looking to preserve wealth for future generations while maintaining control over their assets, Family Investment Companies (FICs) are an alternative option to trusts.
With the October Budget announcing changes to Capital Gains Tax (CGT), Business Asset Disposal Relief (BADR), and Inheritance Tax (IHT), many are exploring FICs as a tax-efficient way to structure investments.
FICs are an effective way to mitigate tax liabilities while ensuring long-term financial security.
The changes announced in the Budget mean that traditional methods of passing down wealth, such as direct gifting or trusts, may no longer be as tax efficient.
FICs offer a way to retain control while minimising tax exposure, making them an increasingly attractive option from a tax perspective.
What is a Family Investment Company?
A Family Investment Company (FIC) is a private limited company set up to hold and manage family wealth, often in the form of investment property, cash, or shares.
Instead of holding these assets in individual names or trusts, they are placed into the company structure, where different family members can be assigned shares according to a planned succession strategy.
Unlike a traditional trust, which may trigger IHT charges when assets are transferred, an FIC allows the original owner (usually a parent or grandparent) to retain control while gradually passing on wealth tax-efficiently.
An FIC is sometimes considered as an alternative to a family trust; however, it is best seen as complementary to a family trust.
It can be used very successfully to achieve two objectives.
- To pass down assets to future generations in a tax efficient way.
- To enable the parents to retain some form of control over those assets.
If used well, an FIC can be invaluable for estate planning, protection of capital, and tax-efficient wealth accumulation.
What are the benefits and risks of an FIC?
There are some key advantages to putting your assets in an FIC – one of the most significant of which is reduced Inheritance Tax (IHT).
Unlike a traditional trust, there is no immediate IHT charge when setting up an FIC.
Additionally, instead of gifting assets outright (which could be subject to IHT if the donor dies within seven years), an FIC allows wealth to be transferred gradually through shareholdings.
As younger family members receive shares, any future growth in the company occurs outside the original owner’s estate, reducing future IHT liability.
This ensures that while wealth is passed down, strategic control remains with the founders.
Furthermore, different share classes allow for flexible dividend payments, which can help reduce overall tax liabilities.
Younger generations can receive dividends when needed, but you can reinvest profits if distributions would be inefficient.
Other advantages include of an FIC include:
- Control: Parents or senior family members can retain voting rights and decision-making power, thereby maintaining control of the company without necessarily having a financial interest in the company. Children or grandchildren can own non-voting shares.
- Corporation Tax: FICs pay Corporation Tax on profits (currently 19 per cent for profits up to £50,000, 25 per cent above £250,000) rather than Income Tax, which can be as high as 45 per cent for individuals. Similarly, any capital gains will be charged at the Corporation Tax rate rather than the normal CGT rate of either 10 or 18 per cent.
- Expenses: Tax can be deducted for expenses. If the company contains a property that could be very useful, especially if there are mortgages, as an individual can no longer claim mortgage relief. Further, dividend income is generally exempt.
However, while FICs offer many benefits, they are not suitable for everyone.
Some key factors to consider include:
- CGT on transfers – If an asset (such as property) is transferred to an FIC at a higher value than when acquired, CGT may be due immediately.
- Stamp Duty Land Tax (SDLT) on property – Transferring property into an FIC triggers SDLT at market value, including the additional five per cent surcharge for second properties.
- Costs and complexity – Unlike simple asset gifting, running an FIC requires ongoing company administration, tax filings, and governance structures.
How to set up a Family Investment Company
Setting up an FIC involves several steps:
- Incorporating the company: The FIC is registered as a private limited company, with parents (or the original asset holders) as directors and family members as shareholders. Multiple share classes can be created to define voting rights and dividend entitlements.
- Transferring assets into the company: This could include cash, investment portfolios, property, or business interests. CGT may apply if assets have increased in value, so careful planning is needed.
- Setting up company governance: A shareholders’ agreement outlines how shares can be transferred, who makes investment decisions, and how family members can benefit from the company.
- Managing tax implications: An FIC needs to file annual accounts, pay Corporation Tax on profits, and comply with reporting obligations. A tax-efficient dividend strategy should be put in place.
FICs are a very effective, flexible way to pass on wealth to future generations whilst retaining control of assets.
An expert private client solicitor can help you set up an FIC that enables you to hold and transfer your wealth tax efficiently, ensuring assets are protected for the next generation.
For tailored advice on whether a family investment company is right for you, get in touch with our Wealth & Succession Planning team today.
