Is a Family Investment Company the Solution to Your Succession Planning?

As a parent or grandparent, deciding how to pass on your wealth to your offspring is one of the most important decisions you’ll make.

Traditionally many choose to do so by putting money into a trust as a way to make sure that cash or other assets are held safely, with only the trustees able to access and/or distribute its contents, according to its terms.

Trusts are common, and a valuable and controlled way to pass on your money, whilst also providing for income and minimising the chances that family members will fritter it away or have to hand it over in the case of a divorce.

However, there are some downsides to trusts, not least the complex tax rules that they’re subject to. The income from the trust is subject to income tax, and a 6 per cent inheritance tax charge applies every ten years on the value of the trust. Plus, there’s a 20% tax charge to pay up-front if the initial cash transfer to the trust exceeds £325,000. These tax rates and allowances can vary considerably too according to the type of trust and how the trust’s beneficiaries stand to benefit from it.

So, this is often the reason why more and more people are looking at Family Investment Companies (FICs) as an alternative.

Graham Doubtfire, Private Client Tax Partner and an expert in family wealth planning takes a closer look at an example of a Family Investment Company to explain how they work and why they might be the solution for your family’s wealth.

What is a Family Investment Company?

Set up as an alternative to a trust, an FIC is a private limited company set up to hold and manage a family’s wealth, with shareholders (usually) made up entirely of family members.

To keep control of the wealth, the company structure can be set up as A shares – where parents and/or grandparents hold overall control and voting rights, and B shares – where shareholders (usually the children) have the rights to just income and capital.

Some, but not all, of the benefits of a conventional trust are mirrored in an FIC, but there are tax benefits too.

What are the tax benefits of an FIC?

Income from the FIC is subject to corporation tax at 25%, rather than higher rate income tax, and dividends received by the company are tax free. There are also additional tax deductions that can be claimed such as the cost of Investment Management Fees where the FIC holds an Investment Portfolio or enhanced tax relief paid on mortgages.

Individual shareholders can receive up to £500 of tax-free dividends each year, personal income distributed can be matched to the available basic rate bands available to each shareholder and Directors Remuneration can be extracted in a number of forms.

Transferring cash into an FIC is also not subject to the up-front inheritance tax charge of 20% which many find prohibitive when setting up a trust that breaches the £325,000 threshold.

Additionally, there are no limitations on the lifespan of an FIC, or the amount that can be invested, so they’re considered to be an effective investment choice where funds exceed £1m.

To understand how an FIC company can work effectively let’s look at a fictional example:

Mr & Mrs D set up a Family Investment Company 2 years ago, using a structure with both A and B Shares.

They formed the Company and then made a loan to the Company of £2m, which was invested in a portfolio of investments.

Over the last 2 years Mr & Mrs D have utilised some of the income and capital growth to draw £50,000 as a loan repayment each year, to supplement their pension and investment income and maintain their standard of living. The loan now stands at £1.9m.

Now that they’ve become more comfortable with the structure and how it all works Mr & Mrs D have decided to further utilise the Family Investment Company.

Their lifestyle has settled down such that they are now confident that they will only need to draw £50,000 each year from the Company as a loan repayment and only £0.9m of the original loan will be needed for the rest of their life. They have therefore decided to gift £1m of the £2m original loan to their two children.

This £1m will remain as a company loan but will now be owed instead to their children.

Classed as a gift, this will be a potentially exempt transfer that remains in their Estate for inheritance tax purposes for the next 7 years, but it will benefit from Taper Relief (a sliding scale of tax for gifts given 3 to 7 years before your death) if the gift is outlived by 3 years.

Creating a financially secure future

One of Mr & Mrs D’s goals when they set up the Family Investment Company was to use it as a way to enhance the financial education of their children.

As a result of the gift of the loan, Mr & Mrs D’s children will be able to draw capital from the Company as a tax-free loan repayment if they wish.

Mr & Mrs D decided to make loan repayments from the income and capital generated by investing the funds that the Company holds, explaining to their children that they want them to use this as an opportunity to generate long term wealth.

£20k is therefore paid to each of the children as a tax-free loan repayment and they each use this to fund their Individual Savings Account (ISA).

Working with their Investment Manager Mr & Mrs D encourage their children to invest this to create their own long-term wealth, using the compounding effect of long-term investment returns by reinvesting income and capital growth.

Over the next 5 years Mr & Mrs D then plan to repeat this to start their children on an investment journey, whilst guiding them on the generation of long-term wealth. In addition, Mr & Mrs D ‘s children are made Directors of the Family Investment Company and are therefore able to be rewarded for the fiscal obligations and responsibilities taken on with that role.

The family decide that a further sum of £25k per annum will be paid to their children, but rather than this being paid to them as a salary they elect for this Director’s remuneration to be paid to them as an Employer Pension Contribution. These funds are also invested, with the guidance from their Investment Manager, to create a pension fund for their future.

The combination of these steps mean that Mr & Mrs D’s children are now each investing £45k per annum (for the loan term) in tax free environments where neither income nor growth are taxed, allowing them to create a lasting legacy for their long-term benefit.In addition, the Employer Pension Contributions and Investment Managers’ charges are tax deductible expenses of the Company which serves to reduce the Corporation Tax liability. Plus, any dividends received by the Company are not subject to Corporation Tax either.

What are the downsides of an FIC?

It’s worth noting here that FICs are a complex investment structure that will have bespoke articles of association, and usually a shareholders’ agreement too. There will still be professional fees to pay to set up and manage the FIC, and company accounts need to be prepared and taxes paid in accordance with HMRC regulations.

If a property is put into the FIC rather than cash, there may well be capital gains tax and potentially stamp duty to pay as well – so it’s always advisable to get professional independent advice before embarking on setting up a family investment company.

It’s also important to point out that in April 2019 HMRC set up a specialist unit to examine the use of FICs as an inheritance tax planning vehicle. As of yet (summer 2025) there have been no major changes announced to the taxation of FICs, but given the economic challenges facing the country, and the changes made to Agricultural Property Relief and Business Property Relief in the October 2024 Budget, it’s very possible that tax amendments may be coming, especially in areas where HMRC may consider the current position to be overly generous.

Is an FIC right for me?

As you’ll have seen from the example above, by adopting this approach and optimising their overall tax position Mr & Mrs D have been able to successfully pass on wealth to their children, whilst still retaining a measure of control over it.

They’ve been able to use the income and capital growth from investing the original capital to maintain the overall capital value in the Company that will gradually be passed to their children. And alongside all of this they’ve still maintained a regular flow of cash to supplement their taxable pension and investment income. A successful outcome all round.

But as every family’s circumstances will differ, the financial benefits of a Family Investment Company will be different too.

That’s why we’re here to help
For more information on Family Investment Companies and advice on whether they could be right for your family please get in touch with Graham or one of the Personal Tax team to talk through your options. Call us on 0330 058 6559 or email hello@scruttonbland.co.uk