A Guide to Family Investment Companies (FICs)

Let us consider a scenario where parents desire to transfer their wealth to their young children whilst ensuring that the children have restricted access to the funds at a young age.

Traditionally, trusts have been a common choice, but they can be legally complex and may not always offer optimal tax efficiency. Many individuals are familiar with a limited liability company, which is what a family investment company is. Furthermore, FICs offer a high level of flexibility, allowing them to be tailored to specific family circumstances and requirements.

What is a Family Investment Company?

A FIC is a privately owned company that is established with the purpose of effectively managing and safeguarding family wealth.

This structure allows for one generation to maintain control over assets accrued during their lifetime whilst also facilitating the transfer of value to subsequent generations, mitigating immediate inheritance tax (IHT) charges.

FICs can employ various types of shares, each carrying different voting and economic rights concerning the distribution of profits or assets (in the event that the FIC were to be wound up). Funding for FICs can be accomplished by subscribing to shares with cash or other assets or by utilising debt such as interest-free shareholder loans or third-party debt provision. Shareholders can charge commercial rates of interest on their loans – the interest is corporation tax deductible and provides a return to shareholders without any NIC costs. It is also possible to combine equity and debt to finance an FIC.

How FICs operate

A FIC functions through the founders transferring cash and non-cash assets into the company in exchange for shares and loans. While the transfer of non-cash assets may attract tax liabilities, the shares can be gifted to family members without incurring inheritance tax if the donor survives for seven years.

The parents hold ordinary shares with voting rights but no entitlement to dividends, while the children hold A, B and C shares with dividend entitlements, subject to parental approval. The company is funded through loans, and it acquires various assets that generate income, which can be reinvested or used to repay the loans. The underlying capital growth occurs in the children’s names.

Family Investment Companies tax implications

1. Inheritance Tax
   If the parents successfully adhere to the typical seven-year rule, a FIC can offer various tax-efficient strategies concerning IHT.
2. Corporation Tax
   For FICs, the applicable corporation tax rate is likely to be 25% as HMRC may deem the FIC as a ‘close investment holding company’ and so the small profits rate of 19% will not apply.
3. Relief on Corporation Tax
   A FIC has the advantage of being able to claim a deduction for corporation tax on bank charges and interest incurred from loans obtained against the value of its investments.
   These loans must be utilised for the business purposes of the company. This provides a benefit over individuals who are unable to claim tax relief on loan interest.
   Tax relief not available personally for debt taken out to acquire assets.
4. Capital Gains Tax
   Proper planning can help mitigate capital gains tax when establishing a FIC. Any future disposals by the FIC will be subject to corporation tax rates, less any applicable reliefs. It’s important to note that while transferring assets into an FIC may result in capital gains tax for the transferor, it can be more beneficial for the FIC to acquire assets using loan funding.
5. Tax on Dividends
   UK dividends received by the FIC are exempt from corporation tax and overseas dividends received are subject to certain rules. It is good practice for the FIC to invest in companies that pay UK domiciled dividends to be tax efficient. However, there is tax on dividends paid by the FIC to its shareholders. Should a shareholder want to extract money from the FIC, it is more efficient to do so via repayment of any loans (should there be any). In addition, the idea of the FIC is to accumulate wealth. In the unlikely event of dividends being extracted from the FIC, there is a threshold exemption limit of £500, which means dividends up to this amount can be tax-free. Any dividends exceeding this threshold will be subject to a starting rate of 8.75%, which mitigates the potential tax burden. It is worth noting that even the highest rate of dividend tax is lower than the current 45% rate applied to trusts. Following the November 2025 budget, the rates of income tax applicable to dividends will change from April 2026. The ordinary rate will be increased by 2 percentage points to 10.75% and the upper rate will also increase by 2 percentage points to 35.75%. However, the additional rate will remain unchanged at 39.35%, so rates are still lower than trust rates.
6. Taxation for Shareholder
   When the FIC distributes dividends, the tax implications for shareholders will vary depending on their individual circumstances. If the dividend payment exceeds the dividend tax allowance (£500 in 2025-26), the tax rate will depend on the relevant tax band. For those in the basic rate tax band, the tax charge will be 8.75%. For individuals in the higher rate band, it will be 33.75%, and for those in the additional rate band, it will be 39.35%. It’s important to note that smaller payments to younger adult shareholders may potentially be tax-free. Following the November 2025 budget, the rates of income tax applicable to dividends will change from April 2026. The ordinary rate will be increased by 2 percentage points to 10.75% and the upper rate will also increase by 2 percentage points to 35.75%. However, the additional rate will remain unchanged at 39.35%.

Establishing a Family Investment Company

The structure, planning, and strategy of a FIC will differ based on the specific circumstances of the founders and owners.

However, establishing a FIC typically involves taking the following factors into consideration:

When setting up a FIC, the founder and owner can choose to gift or loan assets to the company, subject to their own specific tax implications. The FIC can invest in various assets such as bonds, property, securities, jewellery, artwork, classic cars or even hold investments in trading companies previously owed by the founder – i.e. the founder transfers their shares to the FIC.

When setting up a FIC, choosing between a limited or unlimited company structure is important. While unlimited companies offer privacy by not filing accounts, they lack the benefit of limited liability, which can be a risk when engaging in trading or asset disposal. For example, if the FIC invests in investment property (for capital accumulation) that is rented (for income accumulation), a limited company offers protection an unlimited company doesn’t, in that the risk of any claim by the tenants of the property is ring-fenced to the net assets of the company. For an unlimited company any claim is potentially over your entire wealth.

Setting up a FIC involves deciding on the types of shares and voting rights, determining control, income distribution, and asset allocation. The goal is to pass on asset growth to future generations while minimising inheritance tax exposure.

Managing a Family Investment Company

In a FIC, the founder generally serves as the director and makes decisions, while other shareholders benefit financially.

The FIC acquires assets, generates income, and grows in value for future generations. Management practices depend on customised agreements tailored to the founder and their family’s needs. The articles of association and shareholder’s agreements drawn up for the FIC will be key documents in establishing the framework by which the FIC operates.

Whilst the initial set up costs may be quite high, there are longer term security benefits.

Benefits of Family Investment Companies

FICs present various benefits for individuals and families aiming to effectively manage and safeguard their wealth. These structures offer advantages such as increased control, adaptable nature, and opportunities for tax planning.

FICs offer numerous advantages for individuals and families seeking to manage and preserve their wealth. FICs provide opportunities for:

• tax savings through lower corporation tax rates on profits and potential inheritance tax benefits;
• dividends received by the FIC could be tax-free. Profits should accumulate within the company and depending on the types of income, these could accumulate without immediate taxation;
• the corporate structure of FICs also offers some protection in the event of divorce, potentially safeguarding assets from being divided;
• asset protection by separating personal and business assets, minimising risks associated with business activities or creditor claims;
• families can retain control over their assets and involve multiple generations in decision-making processes, ensuring the preservation of wealth and values;
• facilitation of structured succession planning, allowing for a smooth transfer of wealth and legacy to future generations.

Drawbacks of Family Investment Companies

While FICs offer advantages, there are important considerations to keep in mind. Paying out all profits can lead to double taxation, making it more tax-efficient to retain profits within the company.

Transferring assets other than cash can trigger tax charges, and the administrative and ongoing costs of running a FIC can be significant. FICs are not suitable for families needing regular income and can potentially create conflicts among family members. Furthermore, privacy may be compromised due to disclosure and reporting requirements. It’s essential to weigh these factors when considering the establishment of a FIC.

Case study: We look at a property investment FIC where the net value of the properties owned by the FIC increases before your death.

In such a scenario, the appreciation in property value will be subject to IHT at a rate of 40% by HMRC. For instance, if the properties held in the FIC appreciate by £1,000,000 at the time of the shareholders’ passing, the IHT liability on those shares could potentially increase by £400,000.

To address this concern, a recommended solution is to establish ‘Freezer Shares’ or ‘Growth Shares’ as a structured approach.

Are Family Investment Companies and trusts the same?

No.

A FIC is a privately owned limited company designed to effectively manage and protect wealth, as well as facilitate the transfer of wealth to future generations through share ownership. It serves as a strategic planning tool to transfer assets to younger family members while enabling the older generations to retain control over those assets without triggering immediate IHT implications.

A trust is a legal arrangement that allows for the management of various assets, including money, investments, land, or buildings, on behalf of beneficiaries. HMRC recognise different types of trusts, each with its own unique tax treatment.

A trust typically involves three key roles: the settlor, who contributes assets to the trust; the trustee, responsible for managing the trust; and the beneficiary, who can receive benefits from the trust.

Case study: Family Investment Companies for wealth management

Understanding the practical application of FICs can be crucial in effective wealth management.

Below are real-world scenarios that illustrate how FICs can be utilised for efficient asset distribution and tax planning.

Let’s assume you have a surplus cash amount of £10 million along with other assets, and you want to distribute it equally among your four family members. However, due to their young age and concerns about potential future complications like bad marriages or divorce, you hesitate to pass on the cash immediately. If you were to do nothing and pass away, HMRC would collect £4 million in IHT on the £10 million, leaving your family members with only £1.5 million each, making HMRC the primary beneficiary.

To address these concerns, one option is to establish a FIC. In this scenario, you can subscribe for £200,000 of A voting shares and £9,800,000 of non-voting B shares. Subsequently, you can gift the B shares to your family members. If you survive for at least seven years following the gift, these transfers would be exempt from IHT. It is crucial to make these gifts before the company’s value increases to avoid potential capital gains tax implications.

By setting up the FIC, you would gain control of a company with £10 million in cash. This cash can be used to acquire other investment assets or earn interest. This approach provides a structure where you can retain control over the cash while safeguarding against immediate IHT and potential future complications, allowing you to pass on the assets to your family members in a tax-efficient manner.

Conclusion

When assets are gifted to a FIC, there is a potential exemption from inheritance tax, but if the parents pass away within seven years, there could be tax implications. To avoid this, it is more common to transfer investment assets at market value and keep the purchase price as an outstanding loan, eliminating the gift and potential inheritance tax charge.

Transferring assets into an FIC may incur capital gains tax on the disposal of those assets. However, by structuring the transfer as a loan, parents can receive tax-free payments as loan repayments from the FIC.

Overall, setting up an FIC in this way allows for future growth in asset value to be outside the parents’ estates for inheritance tax purposes. Additionally, any income generated by the assets can be received by the parents as loan repayments without additional tax charges.

This approach enables the preservation of both future asset growth and income while potentially reducing inheritance tax liabilities.

How ZEDRA can help

Our team of UK experts have considerable experience in providing advisory services for family investment companies. To find out more please contact one of our dedicated experts.

Disclaimer: Nothing herein shall constitute legal, tax or investment advice of any kind and ZEDRA accepts no liability for any reliance placed on the contents herein which are solely included for the purposes of marketing ZEDRA’s service offerings. Advice should be sought from appropriately qualified advisers to assess the suitability of any solution to your specific circumstances.