Family Investment Companies (FICs) have become increasingly popular as families look to pass on wealth in a tax-efficient and controlled manner. An FIC offers a combination of tax advantages, governance options, and succession planning opportunities that make it an attractive solution for long-term wealth management.
What is a Family Investment Company?
An FIC is simply a private company established to hold investments for the benefit of family members. What sets an FIC apart from other companies is the way its governing documents are drafted, which will be bespoke to the family in question.
Often, parents retain control as directors and through voting shares, while economic value is passed to the next generation “growth” shares or a minority shareholding.
Typically, FICs hold share or property portfolios. Whilst there are no restrictions on the nature of investments, careful planning is needed to ensure that the tax implications are understood when investments are selected to ensure they are compatible with the goals of an FIC.
What are the tax benefits of using an FIC?
One of the main attractions of an FIC is its tax treatment. Like any company, it pays Corporation Tax (CT) on its income and gains (currently at 25%). This is often lower than the income tax rates individuals face on investment income. Furthermore, most dividends received by an FIC are exempt from CT. This means that investment returns can compound within the company without tax erosion, creating greater long-term growth potential.
For property investors, full relief is available for mortgage interest compared with a limit at 20% for individual landlords.
Inheritance Tax (IHT) and succession planning
While FIC shares do not qualify for Business Relief, there are still significant IHT planning opportunities. Moving wealth out of parents hands into children’s can substantially reduce the IHT burden for the family.
Additionally, minority discounts can apply when valuing shares for IHT purposes. For example, a small shareholding in a private company may be valued at a significant discount compared to a controlling stake, reducing the taxable value of the estate and making the sum of the parts less than the whole.
FICs can also be used alongside trusts to enhance asset protection and tax efficiency. For instance, a trust can hold shares in the FIC, allowing income and capital to accumulate outside the settlor’s estate while retaining flexibility over distributions, including to future generations.
Control, protection and flexibility
A well-structured FIC can provide robust protection for family wealth. Adapting the Articles of Association and preparing a Shareholders’ Agreement in line with the family’s needs ensures that wealth stays within the family, defined as you desire. Death, divorce and bankruptcy can be catered for according to your wishes.
Another benefit is flexibility. An FIC allows control to be handed over gradually, either through share transfers or by appointing younger family members as directors. Different share classes can be created to tailor voting, income, and capital rights to individual family members’ needs. This flexibility can also help educate the next generation about financial management and create a shared family purpose around wealth stewardship.
Points to watch
Despite their advantages, FICs are not suitable for every situation. One drawback is the potential for double taxation: profits are taxed in the company and again when distributed as dividends. For individuals who need regular income, a FIC may not be the optimal solution. FICs work best when profits can be retained and reinvested over the long term. Working with investment advisers to develop a suitable strategy is essential to ensure that the structure will be beneficial in the long term.
FICs are also generally not recommended for holding assets that will be used personally, such as a holiday home, as there can be high tax costs associated with personal use of assets held in corporate structures.
Transferring assets into a FIC can trigger inheritance tax, capital gains tax and stamp duty land tax, so tax advice is essential. There are also anti-avoidance rules to consider and be taken into account in the structure to minimise the risk of HMRC scrutiny.
Final thoughts
Family Investment Companies offer a powerful combination of tax efficiency, flexibility, and control. They can help protect family wealth, reduce future inheritance tax exposure, and engage the next generation in financial management. However, they are not a one-size-fits-all solution. Professional advice is essential to ensure the structure aligns with your objectives and is implemented in a tax-efficient and legally robust way.
How PEM can help
At PEM, we advise families on the design and implementation of FICs, ensuring the tax consequences are fully understood and thought through. Contact us to discuss whether an FIC is right for your family.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key changes rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
