Pros and Cons of Family Investment Companies (FICs)

Planning for your business succession and the future of your family is crucial. If you are looking to pass on your company to the next generation, but want to ensure that both your family and wealth are protected. In that case, a Family Investment Company (FIC) can be a valuable tool for tax-efficient wealth planning.

A family investment company (FIC) can be used as part of your tax and succession planning strategy to protect family wealth and secure the future of your business. One of the key benefits of Family Investment Companies is the tax savings they create in areas such as inheritance tax, corporation tax, capital gains tax, and income tax.

In this blog, we’ll look at the pros and cons of Family Investment Companies.

What is a family investment company?

A Family Investment Company (FIC) is a private company controlled and run by its directors ( this is usually either parents or grandparents).

Like other incorporated companies, a Family Investment Company is limited by shares. However, rather than trading, FICs hold investments. Types of investments a FIC can include are property, cash, or equity portfolios.

Typically, business owners establish an FIC to safeguard assets and transfer wealth to future generations.

The company founders typically establish the company and transfer cash or assets, usually through a loan, into the FIC or by utilising incorporation reliefs.

Nowadays, Family Investment Companies are used as an alternative to traditional trust arrangements.

Who would use a Family Investment Company?

Family investment companies (FICs) are popular among entrepreneurs, high-net-worth individuals, wealthy families and business owners. Typically, they are established by higher or additional rate taxpayers with investment or property portfolios who seek a tax-efficient method to pass assets to different family members. FICs are well-suited for long-term, multi-generational tax planning purposes and to pass assets to younger generations.

Pros of Family Investment Companies

Significant tax savings can be achieved by utilising an FIC. This is because profits from a Family Investment Company are taxed at corporation tax rates rather than taxed as personal income or capital gains

Here are the main benefits of a Family Investment Company:

Reduced corporation tax liability

Profits from any investments within the FIC will be subject to potentially lower Corporation Tax rates, instead of higher rate income tax rates.

Corporation tax

Profits from the assets held in the FIC are chargeable to corporation tax rates (CT rates are currently 19% to 25% in 2026/25). This is significantly lower than the top income tax rate if profits are extracted (Current top rate of income tax is 45%).

Note: The 25% corporation tax rate applies to companies with annual profits exceeding £250,000. A 19% small profits rate applies to companies with annual profits below £50,000. If a company’s profits fall between the upper and lower limits, marginal relief is applied to bridge the gap between the two rates.

There is potential to significantly increase the return on investment if the FIC holds an equity portfolio, as dividend payments may be tax-free from company to company.

FICs can be used to hold a residential property portfolio. Rental profits from the portfolio held by the company will be taxed at corporate rates. Companies can deduct any loan interest from the rental income, whereas personal investors are currently restricted to deducting it at the basic rate.

Capital Gains Tax

For capital gains, companies pay corporation tax at a rate of 19% to 25%, compared to the maximum individual Capital Gains Tax (CGT) rate is 24% for higher-rate taxpayers.

Asset protection & wealth management

Individuals can use an FIC to separate their personal and business assets. This can protect from risks such as legal action and divorce, and can better safeguard personal wealth.

Wealth preservation

Wealth can be created, nurtured and protected for future generations via an FIC.

Control and flexibility

Although assets will be transferred to the FIC, the founders and directors can continue to have control over the company’s assets. Different classes of shares can be issued, thereby giving the founders control while other family members reap some of the benefits. This provides flexibility in how the income and capital rights are structured, offering more control and flexibility than a traditional family trust.

Inheritance Tax savings

IHT can be a key concern for families seeking to pass on their wealth. Therefore, inheritance tax benefits can be a primary motivation for establishing a Family Investment Company (FIC). That’s because a gift of shares to children can be a tax-exempt transfer for IHT. This means the value of the gift would fall out of the founder’s estate for IHT purposes, provided they survived the gift by at least seven years.

The transfer of cash or assets into an FIC and the subsequent issue or gift of shares to family members can remove value from the founders’ estate, thereby reducing the IHT exposure on their deaths.

The initial transfer of assets into an FIC is also exempt from Inheritance Tax (IHT), and the assets held in an FIC are not subject to IHT until they are distributed to beneficiaries, thereby reducing the family’s tax exposure.

Tax relief on residential mortgages

If a property held in an FIC is mortgaged, the FIC can deduct the full interest expense against rental income for tax purposes.

Dividends and income

Shareholders are often remunerated through salary and dividends. The tax payable on the dividend income received will be subject to the current dividend tax rates. However, dividend tax rates are usually lower than income tax rates.

For children over the age of 18, payment of a dividend up to the basic rate band can be an effective way of extracting funds from a company. This can often be used to provide income during periods of further education or university.

Maximum tax benefits will be gained when capital and income are retained within the company longer term and then passed on to the next generation.

Cons of Family Investment Companies

Tax implications & tax position

There can be Income and capital gains consequences when using an FIC, so seek professional advice before setting up an FIC.

For example, putting property into an FIC could trigger a Capital Gains Tax charge and a Stamp Duty Land Tax charge. Get tax advice prior to setting anything up and before you transfer assets into an FIC to avoid unnecessary tax charges.

FIC costs

Set up costs and ongoing administration for the company, such as corporation tax returns and annual accounts, can make FICs a more expensive option. However, tax savings made can often offset these additional costs.

Benefits will depend on individual circumstances

A FIC may not be suitable for all families and will depend entirely on individual circumstances. For example, an FIC may not be the right structure for your company if all the profits are extracted.

Family conflict can have a lasting impact on the operation of an FIC. Direct family members may disagree on how the company is managed, so this has to be carefully considered and managed.

HMRCs view on Family Investment Companies

In 2019, HMRC established a unit to investigate the use of FICs. The focus was on FICs and inheritance tax. The investigation concluded that FICs were being used as a planning strategy for the transfer of generational wealth and the mitigation of Inheritance Tax. However, HMRC found no evidence to suggest a correlation between people who established Family Investment Company Structures and tax non-compliance behaviour. Therefore, FICs remain a tax-efficient structure for now and are unlikely to be challenged by HMRC in the short term.

What’s the difference between a family investment company and a trust?

A Family Investment Company (FIC) operates like a traditional trust. However, trusts can be less flexible and tax-efficient than a Family Investment Company.

Directors and shareholders can continue to hold shares in an FIC, thereby retaining some control and reaping the benefits from the assets and potential profits. Trusts, however, allow assets to be settled for the benefit of the beneficiaries. A trustee can be the settlor, so you can still retain some element of control; however, it typically excludes the settlor of the trust, benefiting from the assets ongoing. If the settlor does benefit from the assets in a trust, they are still treated as forming part of your estate and subject to inheritance tax.

Because of the complex tax implications of both an FIC and a trust, you should seek advice from a tax professional, such as dns accountants to set up the right option for you and explain the tax treatment and consequences of both options. A tax professional will aim to avoid the possibility of triggering unnecessary tax charges.

How do I set up a Family Investment Company?

Always use an experienced tax advisor such as dns accountants to set up your FIC. The process is generally as follows:

1. The founders transfer cash into the company in exchange for a combination of shares and loans. You can transfer non-cash assets such as property; however, be aware that this may trigger stamp duty land tax or capital gains tax liabilities for the transferor.

2. The founding shareholders gift shares of the company to other family members as a potentially tax-exempt transfer.

3. The founding shareholders typically maintain control over the company, including the payment of dividends and the return of capital. This can be achieved by issuing different types of shares and separating the rights associated with these shares within the Articles of Association and a shareholder’s agreement.

Conclusion

Tax efficiency when passing on wealth and family assets to future generations is key.

A FIC provides asset protection whilst retaining control over assets, accumulating capital growth and passing on wealth in a tax-efficient manner.

A Family Investment Company (FIC) can often be a more tax-efficient and flexible alternative to a family trust. However, seek professional advice from a tax professional, such as dns accountants to minimise potential immediate tax consequences and maximise tax savings.

While there are costs involved in setting up an FIC, often the tax savings can offset these costs. An FIC should form part of your wider succession and wealth planning strategy.

For more help and advice on Family Investment Companies and other tax planning, contact dns on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

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