With changes to Capital Gains Tax (CGT), Business Asset Disposal Relief (BADR), and Inheritance Tax (IHT) announced in the October Budget, many individuals and business owners are re-evaluating how they pass down wealth.
Traditional methods such as outright gifting or trusts may no longer offer the same tax advantages they once did.
This is where Family Investment Companies (FICs) come in.
A growing number of families are turning to FICs as a way to structure and manage investments while reducing tax liabilities.
So, what exactly is an FIC, and could it be the right solution for you?
Understanding Family Investment Companies
A Family Investment Company is a private limited company designed to hold and manage family wealth.
Rather than owning investments (such as property, shares, or cash) directly or through a trust, these assets are placed within the company.
Different family members then hold shares according to an agreed succession plan.
Unlike trusts, which can trigger immediate Inheritance Tax (IHT) charges when assets are transferred, an FIC allows wealth to be passed down gradually without losing control.
Parents or senior family members can retain voting rights while distributing non-voting shares to younger generations, ensuring that long-term decision-making remains in their hands.
The tax advantages of an FIC
FICs provide several tax efficiencies compared to holding assets personally:
- Corporation Tax savings – Instead of paying up to 45 per cent in Income Tax on investment income, an FIC pays Corporation Tax on its profits. The current rate is 19 per cent for profits up to £50,000 and 25 per cent for those exceeding £250,000.
- Flexible dividends – With different classes of shares, dividends can be distributed tax-efficiently, allowing family members to receive income when needed while reinvesting profits elsewhere.
- No immediate IHT charge – Unlike trusts, which often face an upfront IHT charge of 20 per cent when assets exceed the nil-rate band, an FIC avoids this immediate tax hit. If shares in the FIC are gifted to family members, they fall under the Potentially Exempt Transfer (PET) rules. This means they will be free from IHT if the donor survives seven years after making the gift. If the original owner retains control over the FIC without transferring shares, the value of their shares could still be included in their estate for IHT purposes when they die.
However, tax efficiency is not the only reason people opt for FICs. They also provide control and security, allowing families to manage wealth with long-term planning in mind.
How to set up a Family Investment Company
Establishing an FIC involves careful planning and structuring. Here is an overview of the process:
Incorporating the company
The first step is registering a private limited company.
Typically, parents or senior family members act as directors, while shares are issued to family members based on a pre-determined succession plan.
Different share classes can be created to allocate voting rights and dividend entitlements.
Transferring assets into the FIC
Wealth can be transferred into the company in various forms such as cash, property, or investment portfolios.
However, transferring certain assets may trigger Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT), so expert tax planning is required.
Establishing governance rules
A shareholders’ agreement sets out how shares can be transferred, who makes investment decisions, and how the company will operate.
This document ensures clarity on wealth distribution and decision-making.
Managing tax compliance
Like any company, an FIC must file annual accounts, pay Corporation Tax on profits, and follow reporting requirements. A well-planned dividend strategy can optimise tax efficiency while ensuring family members receive income as needed.
Potential drawbacks to consider
While FICs offer substantial benefits, they are not suitable for everyone. Key considerations include:
- Capital Gains Tax (CGT) on transfers – If assets transferred into the FIC have increased in value since acquisition, CGT may be payable at the time of transfer.
- Stamp Duty Land Tax (SDLT) on property – Property transfers into an FIC attract SDLT at market value, plus the additional five per cent surcharge for second properties.
- Administrative burden – Unlike simple asset gifting, FICs require ongoing company administration, tax compliance, and governance structures.
FICs can be highly effective for long-term wealth management, but they require careful setup and ongoing management to remain beneficial.
Is an FIC right for you?
Family Investment Companies can be an excellent tool for tax-efficient wealth management, offering control, flexibility, and succession planning benefits.
However, they are not a one-size-fits-all solution.
If you are considering an FIC and want expert advice on structuring it effectively, our team of accountants can guide you through the process.
Contact us today to discuss your options.