How a Family Investment Company (FIC) can save you inheritance tax

Inheritance Tax (IHT) remains one of the most significant challenges facing families and business owners who have built substantial wealth.

As asset values increase, more estates fall within the IHT threshold - often leading to a hefty tax bill for family members.

For families who want to protect their wealth and ensure it benefits younger generations, a Family Investment Company (FIC) can be an effective, tax-efficient solution to minimise inheritance tax liabilities.

In this article, we explain what a Family Investment Company is, how the family investment company can save you inheritance tax, who can benefit, the tax benefits and how it can form part of a robust IHT tax planning strategy.

What is a Family Investment Company?

A Family Investment Company (FIC) is a private limited company designed to hold and manage family wealth. It provides a structured way to invest and transfer assets, such as property, shares, or cash, between generations while retaining control within the family.

Unlike a trading company, an FIC is primarily an investment vehicle. It’s designed to build and preserve wealth over time rather than run a business. What makes it particularly attractive is that it combines the control and governance of a company with some of the tax efficiency and succession benefits traditionally associated with trusts.

The founders (often parents or grandparents) provide capital to the company, either by investing funds or transferring existing assets. In exchange, they receive shares in the FIC typically divided into different classes of shares that separate ownership, control, and entitlement to profits or capital growth.

How a Family Investment Company works

Although every Family Investment Company is bespoke, the structure usually follows a similar pattern.s

1. Formation and capital injection

The founders create a UK-registered limited company and provide initial funding. This can take the form of:

• A cash investment (subscribing for shares);
• A loan to the company (allowing founders to withdraw funds later without triggering tax); or
• A transfer of assets, such as property or shares (which may have capital gains or stamp duty implications).

Once the company is funded, it invests the capital into income-generating or appreciating assets — for example, property portfolios, investment funds, or equities.

2. Different classes of shares

To ensure flexibility and tax efficiency, the FIC usually issues several types of shares:

• Voting shares: Held by the founders to retain control of company decisions.
• Non-voting or growth shares: Held by children or other family members to benefit from future increases in company value.
• Dividend shares: Sometimes created to distribute income selectively.

This share structure allows founders to transfer economic value while maintaining decision-making control.

3. Control through the board

The founders or parents typically act as company directors. This allows them to control the company’s investments, dividend policy, and governance decisions, even if younger family members hold a large portion of the equity.

4. Managing and growing the investments

The FIC can invest in a range of assets depending on the family’s objectives and risk appetite. The company pays corporation tax on its profits (currently 25% for larger profits, lower than the personal income tax rates). This means returns can often be reinvested more efficiently within the company than by holding the same assets personally.

5. Gradual wealth transfer

Over time, founders can gift or transfer growth shares to younger family members, either outright or via trusts. The value of these gifts may qualify as Potentially Exempt Transfers (PETs) for inheritance tax, provided the donor survives seven years from the date of the gift.

Who can benefit from a Family Investment Company?

A Family Investment Company is suitable for individuals or families with significant wealth, typically £1 million or more in investable assets, who want to manage that wealth strategically.

It’s especially useful for:

• Business owners or entrepreneurs who have sold a company and want to reinvest proceeds tax-efficiently.
• Families with large investment or property portfolios seeking a more controlled structure for managing and transferring wealth.
• Parents or grandparents wishing to provide for children or grandchildren while maintaining oversight of how funds are used.
• Those concerned about future tax changes who want to lock in a long-term, flexible structure.

An FIC is not just for ultra-high-net-worth individuals. It can be an excellent option for families with growing assets who want to plan ahead, especially those already exposed to IHT or considering succession planning for family businesses.

What are the benefits of a Family Investment Company?

1. Control and governance

The biggest advantage of an FIC is control. Founders remain directors and voting shareholders, retaining the power to make key decisions on investments, distributions, and operations. This ensures that wealth is managed in line with family values and long-term goals.

2. Flexibility in ownership

By creating multiple share classes, families can determine exactly who benefits from income or capital growth and when. This flexibility makes it easier to plan succession in stages rather than transferring assets outright.

3. Tax efficiency

There are tax implications and immediate tax consequences when setting up a Family Investment Company. Therefore, it is advised to seek assistance from qualified tax professionals, such as dns accountants, before deciding if FIC is right for you. When set up in a tax-efficient manner, an FIC can offer tax advantages and savings.

Corporation tax

A Family Investment Company (FIC) offers several benefits in terms of corporation tax efficiency. Unlike individuals who pay income tax on investment income at higher personal rates, an FIC is subject to corporation tax on its profits, which is generally lower. This allows investment income, such as dividends (often received tax-free from UK companies) and capital gains, to accumulate within the company more tax-efficiently. The retained profits can then be reinvested to grow family wealth without triggering additional personal tax liabilities.

Inheritance tax (IHT) planning

An FIC is a powerful tool for inheritance tax planning because it allows parents to transfer wealth to future generations while retaining control. By structuring the company with different classes of shares, such as voting shares for parents and non-voting growth shares for children, parents can manage how profits and capital growth are distributed without immediately giving up control. This arrangement enables gradual wealth transfer, potentially reducing the value of the parents’ estate for IHT purposes while keeping the family’s assets consolidated and protected.

If the Family Investment Company (FIC) is funded through a director’s loan, the funds can be invested by the company; however, because it is a loan, they do not count as a net asset on the company’s balance sheet. This means that the FIC initially has no effective value. If, at this stage, you gift shares in the company to your children, those shares will also have a nil value because the company has not yet generated any growth. Consequently, this transfer does not create an inheritance tax (IHT) liability. Any future growth in the value of the investments will then sit outside your estate, allowing your beneficiaries to benefit from it free of IHT.

The drawback is that the eventual increase in value may be subject to Capital Gains Tax (CGT), which is currently charged at a lower rate than IHT (24% compared with 40%). To optimise the outcome, your tax adviser, solicitor, and financial planner should develop a strategy to have the loan repaid or written off before your death. Doing so would enable the full value to pass to your heirs without triggering IHT. Because the process can be complex, obtaining professional advice is strongly recommended.

Dividends paid

When profits are extracted as dividends, shareholders pay personal tax on dividends received. When the company pays dividends, they are taxed as income at each individual’s marginal tax rate. There is currently a £500 tax-free dividend allowance. Basic-rate taxpayers, such as children or young adults, may pay tax at a rate as low as 8.75% on these dividend payments.

4. Asset protection and control

An FIC provides a strong level of asset protection, as the company structure separates ownership from control. Parents or founders can maintain decision-making authority through voting shares and directorships, while younger family members hold non-voting shares that benefit from long-term growth. This setup safeguards family assets from potential risks such as divorce settlements, creditor claims, or poor financial management by heirs, ensuring that wealth remains under prudent supervision.

5. Flexibility and succession planning

The FIC structure is highly flexible and can be tailored to suit a family’s unique needs and long-term goals. Different share classes can be used to control income distribution and capital entitlement, allowing the family to manage succession in a gradual and controlled manner. This flexibility also supports changes in circumstances over time such as introducing new family members, adjusting profit distribution, or modifying control arrangements without dismantling the structure.

6. Reinvestment and wealth growth

Because profits retained within an FIC are not subject to personal taxation until distributed, more funds are available for reinvestment. This allows the company to compound wealth over time by reinvesting after-tax profits into diversified assets such as property, shares, or other investments. Over the long term, this reinvestment potential can significantly help to accumulate family wealth, providing a sustainable and tax-efficient vehicle for intergenerational growth.

• Dividend income from UK companies is often exempt from corporation tax.
• Gains realised within the company are taxed at corporation tax rates, which may be lower than capital gains tax for individuals.
• Retained profits can be reinvested to compound returns faster than they would in personal ownership.

What types of assets can a FIC hold?

A Family Investment Company (FIC) is permitted to own a wide range of assets, such as cash, real estate, or company shares. The founders can contribute a lump sum of money to the FIC, which the company can then invest. Alternatively, existing assets like rental properties or investment portfolios can be transferred into the FIC. Once these assets are transferred, they become the legal property of the FIC and generally no longer count as part of the founders’ estates for inheritance tax (IHT) purposes so long as the founders do not retain any benefit from them. However, transferring non-cash assets can trigger tax liabilities, so professional advice should be obtained to ensure that transfers are made in a tax-efficient manner.

How to set up a Family Investment Company

Creating a Family Investment Company (FIC) involves several key stages:

1.Company formation:
The first step is to incorporate the FIC as a private limited company. Typically, the parents or original asset owners act as directors, while family members hold shares. Different share classes can be issued to control voting rights and determine how dividends are distributed.

2.Transferring assets:
Funds, property, investment portfolios, or business interests can be moved into the company. If these assets have appreciated in value, Capital Gains Tax (CGT) may be payable, so it’s important to plan the transfer carefully.

3.Establishing governance arrangements:
A shareholders’ agreement should be drawn up to set out how shares are managed and transferred, how investment decisions are made, and how family members can benefit from the company.

4.Managing tax and compliance:
The FIC must submit annual accounts, pay Corporation Tax on any profits, and meet all statutory reporting requirements. A well-structured, tax-efficient dividend policy should also be implemented.

How a Family Investment Company can save Inheritance Tax (IHT)

Inheritance tax planning is often the primary reason families establish an FIC. Here’s how the structure helps to reduce IHT liability.

1. Freezing the value of the founder’s estate

When parents establish an FIC, they can retain only control shares with limited rights to future growth. The capital growth generated by the company’s investments is allocated to other shareholders (typically the next generation).

This effectively “freezes” the value of the founder’s estate meaning that while the family’s total wealth grows, the founder’s taxable estate remains constant or even reduces over time.

2. Gifting shares and the seven-year rule

Transferring shares in the FIC to family members can be treated as Potentially Exempt Transfers (PETs) for inheritance tax purposes.

If the donor survives seven years from the date of the gift, the value of the shares is completely outside their estate for IHT. Because growth shares are often low in value at the time of gifting, this allows large future value to be transferred out of the estate at minimal risk.

3. Discounted share valuation

For IHT purposes, minority shareholdings such as those given to children or held by trusts may be valued at a discount because they carry no control and are less marketable. This discount can reduce the effective taxable value of the founder’s estate, creating further IHT efficiency.

4. No immediate IHT charge

Unlike transferring assets into a discretionary trust, which can trigger a 20% IHT charge above the nil-rate band, transferring assets into an FIC (either as a loan or share subscription) generally doesn’t cause an immediate inheritance tax bill. This flexibility allows families to structure their wealth without the upfront costs associated with other estate-planning vehicles.

Example: Using an FIC for IHT Planning

Consider a couple who invest £3 million into an FIC. They each hold 100 voting shares and loan the company £1 million (a director’s loan). Their two children each hold 500 growth shares.

Over 10 years, the company’s investments have grown to £6 million. The parents’ voting shares remain fixed in value, while the children’s growth shares now represent the increase.

If structured correctly and the parents survive seven years, the £3 million of growth sits outside their estate for inheritance tax purposes potentially saving £1.2 million in IHT (40% of £3 million) while keeping control in the parents’ hands.

Important risks and limitations

While a Family Investment Company can offer substantial benefits, it’s not suitable for everyone. Potential drawbacks include:

• Complexity and administration: The company must file annual accounts and tax returns.
• Upfront costs involved: Legal and professional fees can be significant.
• Changing tax rules: Future governments could alter how FICs are taxed.
• Double taxation risk: Profits may be subject to corporation tax within the company and dividend tax when distributed personally.

That’s why professional advice is essential before setting up an FIC ensuring the structure is both compliant and tax-efficient.

Why work with dns accountants?

At dns accountants, we focus on helping families and business owners grow, manage, and safeguard their wealth. Our team of tax specialists has extensive experience with Family Investment Companies, trusts, and inheritance tax planning.

We take a tailored approach carefully assessing your assets, family objectives, and long-term aspirations to create a strategy that fits your needs. Whether you’re setting up an FIC for the first time or refining an existing arrangement, we’ll help you achieve maximum control, tax efficiency, and peace of mind.

In summary

A Family Investment Company (FIC) is an effective estate planning tool that enables you to:

• Maintain control over your family’s wealth and assets
• Minimise potential inheritance tax liabilities
• Create and preserve wealth across generations
• Manage your finances within a clear corporate structure

By locking in the current value of your estate, transferring future growth to your heirs, and retaining control over investment decisions, an FIC can help safeguard the legacy you’ve built.

To discover how a Family Investment Company could enhance your inheritance tax strategy, contact dns accountants. Our experienced advisers can guide you in structuring, managing, and protecting your wealth for the future.

Contact dns on 03300 886 686 or email us at [email protected].

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.