For those with significant wealth, planning for inheritance tax is no longer optional.
With increasing scrutiny from HMRC and rising estate values, more high-net-worth individuals are looking for effective ways to preserve family wealth.
One solution gaining traction is the Family Investment Company: a tool that allows wealth transfer without relinquishing control.
(Read Time: Approx. 4 minutes)
Topics Discussed:
- How Family Investment Companies reduce inheritance tax exposure while preserving control
- Key benefits and warnings for those considering this wealth planning strategy
Why Inheritance Tax Demands Attention
If your estate is valued at £10 million, doing nothing could result in a £4 million inheritance tax bill.
The current IHT rate remains at 40% for the 2025/26 tax year, applicable to the value of an estate above the nil-rate band of £325,000.
This is also supplemented by the Resident Nil Rate Band of £125,000. Overall, you’re afforded £500,000 tax free if your estate includes property.
Some may take the view that it’s not their issue and leave it for their heirs to handle. But for those thinking long term, this can be a costly and short-sighted approach.
An alternative is to gift wealth directly to the next generation.
However, this can raise concerns around potential divorce, mismanagement, or premature access to funds.
If you had multiple children, a divorce may still result in a 50% loss of assets
This would mean you still preserve 75% of your estate if you had two children, or a higher percentage with more children: a better outcome than paying 40% to HMRC.
Yet, there is a third option that balances control with planning.
How a Family Investment Company Works
A Family Investment Company (FIC) is a private company structure used to manage and pass on wealth in a tax-efficient way.
Unlike trusts, which are more rigid and come with specific IHT charges, FICs offer flexibility and are becoming a preferred choice for those managing estates worth several million pounds.
Keep Control While Transferring Value
An FIC allows the founder to maintain control through voting shares, while gifting non-voting shares to family members.
These can be structured so different family members receive different proportions of income or capital.
Tax Efficiency Through Corporation Tax
As of the 2025/26 tax year, UK corporation tax is charged at 25% for companies with profits above £250,000.
This is significantly lower than the 40% IHT rate. Profits retained within the company can be reinvested, helping grow the estate over time while deferring or reducing personal tax exposure.
Capital gains and dividends within the company are also taxed at corporate rates, not personal ones.
Asset Protection and Divorce Planning
Since the assets are owned by the company, not the individuals, they are less vulnerable to claims in the event of divorce or separation.
Share structures can restrict transferability, and company articles can be drafted to limit external control.
This gives added protection compared to outright gifting, where legal ownership (and exposure) changes immediately.
Comparing the Main Strategies
Let’s consider three common inheritance tax strategies:
- Doing nothing means heirs face the full 40% IHT charge. It’s simple but often the least efficient approach.
- Gifting assets reduces the estate but introduces risk. If the donor survives seven years, the gift escapes IHT, but early death brings the asset back into the estate.
- Setting up an FIC combines the best of both: control for the founder, reduced exposure to inheritance tax, and tax-efficient growth through corporate structures.
Each comes with its own level of complexity and risk.
The Family Investment Company sits in the middle, offering more control than gifting but requiring more structure and planning than doing nothing.
A Word of Caution
It’s vital to seek expert legal and tax advice when setting up an FIC.
While they are fully legal and not considered abusive tax schemes, HMRC keeps a close eye on aggressive planning tactics.
A poorly structured FIC or one set up based on informal advice from non-specialists could trigger unexpected tax liabilities, especially if control provisions or shareholder agreements are not properly managed.
Summary
Family Investment Companies are a powerful tool for high-net-worth individuals looking to reduce inheritance tax while keeping control of their wealth.
With corporation tax at 25% and inheritance tax at 40%, structuring things right can protect millions. But execution is everything.
If you’re considering setting up an FIC, get in touch with Tax Expert today.
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