Inheritance tax is no longer a concern limited to the ultra-wealthy. As government policy tightens and thresholds remain frozen, families across the UK are urgently seeking effective ways to preserve wealth.
Trusts have long been the default option, but a lesser-known alternative is gaining ground.
Family Investment Companies (FICs) instead offer a compelling route that combines control, flexibility and potential tax savings.
(Read Time: Approx. 3 minutes)
Topics Discussed:
- The benefits and rising popularity of Family Investment Companies amid looming tax reforms
- Key differences between FICs and trusts, including tax implications and setup complexity
What is a Family Investment Company?
A Family Investment Company is a private limited company usually created by parents or grandparents to manage and pass down family wealth.
Unlike traditional gifting or trusts, FICs allow for more detailed control over assets while potentially offering better tax treatment.
There are a few common ways to structure these companies:
- Loan Funding: Parents loan money to the FIC and allow the future growth in value to benefit their children. In some cases, this structure is combined with a trust to hold the shares while retaining control.
- Equity Gifting: Parents subscribe for shares and immediately gift them to family members. The value of these shares falls outside the donor’s estate for inheritance tax, assuming they survive the gift by seven years.
The directors (typically the older generation) manage the company, while children and other family members are shareholders and benefit from the company’s growth.
Why Are FICs Gaining Popularity?
FICs are becoming more common in response to recent tax changes and political proposals:
- Labour has proposed including unused pension pots in the inheritance tax net from April 2027.
- The current IHT thresholds are frozen until at least 2030, meaning more estates will be caught in the net.
- Capital gains tax has increased from 20% to 24% for higher-rate taxpayers.
- Corporation tax, now capped at 25%, is still lower than the 45% top rate of income tax paid by trusts.
These developments are encouraging families with estates of around £2 million or more to consider FICs as a long-term planning tool.
The Key Advantages of FICs
Retain Control
FICs give parents or founders the ability to stay in charge. Unlike trusts, which often require the donor to step back to achieve tax benefits, FICs let directors maintain decision-making powers.
Voting rights can be kept separate from economic benefits through different share classes. However, it’s important to consider how HMRC may value these voting shares for IHT purposes.
Tax Treatment
FICs fall under corporation tax rules:
- Corporation tax is capped at 25%, significantly lower than trust income tax rates of up to 45%.
- Most dividends from UK and overseas companies are tax-exempt within the FIC.
- Unlike trusts, FICs have no limit on the value that can be passed on via shares without immediate IHT charges.
Familiar Structure
FICs operate like regular companies, something many clients find more straightforward.
This can make them easier to understand and manage compared to the often-misunderstood world of trusts.
Comparing FICs and Trusts: Key Distinctions
Here are some core differences to consider when deciding between a FIC and a trust:
- Control: FICs allow parents to stay in charge as directors. Trusts typically require the settlor to give up control to avoid adverse tax consequences.
- Inheritance Tax: FIC shares can be gifted without an immediate charge, provided the donor survives seven years. Trusts face a 20% IHT charge on gifts above the nil-rate band of £325,000.
- Privacy: FICs must file accounts publicly with Companies House. Trusts are more discreet, with no public disclosure required.
- Ongoing Charges: FICs pay corporation tax and personal tax applies when profits are taken out. Trusts face a 6% charge every ten years on relevant property over the threshold.
- Ease of Use: FICs are often easier to understand and feel more familiar. Trusts, in contrast, are more complex and typically require specialist advice.
How to Set Up a Family Investment Company
Creating a FIC requires detailed planning and professional advice. Here’s a summary of the steps involved:
- Select Company Type: Decide whether the company will be limited or unlimited. Unlimited companies offer greater privacy but increase personal risk.
- Register the Company: Incorporate the FIC with Companies House, appoint directors, and choose a company name.
- Draft Shareholder Agreements: This agreement sets out how shares are distributed, who controls voting rights, and how the business will be run.
- Fund the Company: This might include cash, investments, or even valuables like artwork. Note that transferring existing assets can trigger capital gains tax.
- Gift Shares for IHT Purposes: Shares can be gifted to family members. Provided the donor survives for seven years, this removes the value from the estate for inheritance tax.
What Are the Costs?
Setup costs typically range from £5,000 to £20,000, depending on complexity and the professionals involved.
Annual maintenance costs are also higher than for standard trading companies due to more involved tax planning and reporting requirements.
Potential Drawbacks of FICs
While attractive for many, FICs are not suitable for every situation. Be mindful of the following:
- Double Taxation: Profits are taxed at the company level and again when extracted by shareholders through dividends or salary.
- Reduced Privacy: Annual accounts must be filed with Companies House, making some information public. An unlimited company may help avoid this, but brings added risk.
- HMRC Attention: The structure’s transparency may invite scrutiny. High-value estates and complex arrangements can lead to in-depth compliance checks.
Summary
Family Investment Companies are emerging as a flexible and powerful tool for families looking to pass on wealth efficiently while keeping control.
They offer a tax-efficient route that many find more accessible than trusts, particularly for those with significant surplus cash.
That said, FICs are not for everyone. The legal, tax and administrative responsibilities require careful handling and professional support.
If you’re ready to take control of your estate planning and want to explore how a Family Investment Company can support your goals, get in touch with us at Tax Expert.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel