Professional advisers to the ultra high net worth – from accountants to wealth managers – are seeing a shift in how their clients want to manage their affairs. More enquiries are coming in for family investment companies (FICs) as a way to pass on wealth while potentially paying less tax on it.
One of the consequences of the Autumn 2024 Budget announcements on inheritance tax (IHT) is that many families are now considering passing assets on to the next generation sooner than they might have otherwise planned, according to accountancy firm RSM. This is where family investment companies come in.
Chris Etherington, partner at RSM, said: “Historically, trusts have been the preferred solution. However, trusts have become more challenging due to potential upfront tax charges that can result in a 20% IHT liability, particularly on larger gifts into a trust.”
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No such upfront charge is due on gifts of shares via a family investment company, another way to avoid inheritance tax. “As a result, the use of trusts has steadily declined since 2006 [when then chancellor Gordon Brown brought in the 20% upfront IHT liability for trusts], while in our experience, the use of an alternative vehicle, the family investment company (FIC), has increased,” said Etherington.
What is a family investment company?
A family investment company – or FIC – is essentially a private company set up to hold, invest and distribute family wealth.
The typical structure involves parents as both directors and shareholders, retaining voting control through one share class. Meanwhile children or grandchildren hold different share classes with limited or no voting rights but entitlement to dividends and capital growth.
The experience at wealth manager Six Degrees is that family investment companies tend to become suitable for investment portfolios of around £5 million or more, due to the costs and administration it takes to set them up and run them.
“However under certain circumstances it may be suitable for lower amounts,” said Katherine Waller, co-founder of the firm.
Assets held within a FIC are subject to corporate tax rates – meaning corporation tax of up to 25% and dividend tax rates of 8.75% at the basic rate, the higher rate of 33.75% and additional rate of 39.35% – which may be better versus the assets being subject to personal tax rates.
FICs are sometimes confused with trusts, but they are completely different structures: while ownership of trust assets lies with the trustees, companies are typically owned and controlled by shareholders.
“Settling assets into a trust typically entails giving away assets, and control, while holding assets in a company enables asset owners to retain control and ownership,” said Waller.
Why would you set up a family investment company?
There are a number of reasons to set up a family investment company.
1. Inheritance tax
From an inheritance tax perspective, family investment companies are efficient, as it can remove value from the parents’ estates, which might otherwise be subject to 40% IHT, although this liability is transferred to another family member.
Like a transfer into a trust, gifts of shares via a family investment company count as a potentially exempt transfer (PET) for inheritance tax. This means the value of the gift would fall out of the donor’s estate for IHT purposes, provided they survived the giving of it by at least seven years.
James Floyd, managing director at pension firm Alltrust Services, said: “The appeal is understandable. FICs enable parents to freeze the value of assets in their estate for inheritance tax purposes whilst retaining control, and the transferred value begins its seven-year IHT rule immediately.”
2. Asset protection
Shares held by beneficiaries are separated from their personal financial circumstances, offering protection from creditors or divorcing spouses.
3. Better for entrepreneurs
Six Degrees works with a lot of entrepreneurs, who are often more comfortable with a company structure than with a trust.
“A company feels tangible. You can run board meetings, review investments, and involve the next generation in decision-making. It’s a great way to involve the different family members with the wealth, and share ownership responsibly,” said Waller.
4. Retaining control
Wealthy parents who see the value of gifting assets to manage their inheritance tax liability but are concerned about giving large sums to their children and want to retain control are a key demographic for FICs.
5. Tax efficiency
Holding investments in companies can also be tax-efficient, since companies generally do not pay corporation tax on dividends received from shares held.
Giving different share classes to children also lets parents easily distribute dividends to them, taxed at the children’s own marginal rate, which is often low (basic rate) or zero (within the personal allowance). This could be useful when funding university fees for example. “If they are not earning an income themselves this approach can be incredibly tax efficient”, said Six Degrees’ Waller.
6. Flexibility
FICs also offer wealthy families flexibility when it comes to moving their money around. They enable assets to be ‘lent in’, using redeemable preference shares, meaning the original capital may be repaid without triggering any tax.
What are the pros and cons of family investment companies?
Pros
“The biggest advantage is control,” said Waller. “Parents can keep voting rights while shifting value to their children gradually, and the company pays corporation tax on income and gains, which can be lower than personal tax rates. It’s also flexible – you can decide how profits are reinvested, distributed, or lent.”
Cons
The flip side is complexity. You need proper governance, accounting, and a clear plan for how to get money out efficiently. It’s not a set-and-forget structure. “So it’s important to go in with eyes open and see it as part of a bigger family strategy, aligned with the wealth’s purpose, rather than simply a tax play,” Waller said.
How much does it cost to set up a family investment company?
Tax advisers charge between £15,000 and £25,000 to set up a family investment company, in Six Degrees’ experience.
Ongoing compliance – annual accounts, CT600 returns, confirmation statements at Companies House – is likely to add £2,000 to £5,000 annually, according to pension firm Alltrust Services.
“In addition to the monetary cost it’s an investment of time to get the structure right at the start,” said Six Degrees’ Waller. “Setting one up is actually the easy bit – you can incorporate a company in a day. The hard work is in designing it properly. Who gets voting shares, who gets growth shares, how decisions are made. That’s where the value lies.”
Double taxation?
Family investment companies seemingly have much to recommend them. But some experts say they also suffer a “brutal taxation” that undermines their economic attractiveness for many families.
“The structure suffers from double taxation: corporation tax at 25% on profits, followed by income tax on dividends at 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate. This creates significant tax drag on investment returns,” said Floyd from pension firm Alltrust Services.
However David Denton, tax expert at wealth firm Quilter Cheviot, said because of the way FICs are established and invested, this can change the narrative around double taxation in several ways.
“For example, not all profits held within a company – trading or investment – are taxable. This is because most dividends aren’t taxable when equities are owned by another company. An investment policy with a bias to high dividend paying shares can substantially reduce the internal effective rate of tax,” he said.
At the same time, FICs may be partly or fully funded by way of a loan. If structured correctly, loan repayments to the founders are not subject to tax.
As mentioned, if grandchildren are share class owners, then otherwise taxable dividends may fall within their tax-free personal and dividend allowances.
Finally, said Denton, “on final wind-up of a company, it is possible capital gains tax is due at a maximum of 24% rather than dividend taxation at a maximum of 39.35%”.
Family pension trusts – an alternative to family investment companies
A potential alternative to a family investment company that achieves the same control and succession planning aims – but with potentially better tax treatment – is the family pension trust.
Established through a small self-administered scheme (Ssas) or a Sipp, “the taxation advantages to a FIC are substantial and immediate,” said Floyd.
Pension investments grow completely tax-free, he pointed out, eliminating the 25% corporation tax FICs face. Money can be drawn tax-efficiently using pension income rules, avoiding the dividend tax that can make FICs expensive.
“In addition, contributions attract tax relief up to 45%, providing an immediate boost that FICs cannot match,” Floyd said.
Pensions currently remain outside the estate for IHT purposes, though changes are coming in April 2027, when any unused pensions will be subject to inheritance tax.
“For business owners looking to hold trading assets or property not qualifying for pension investment, FICs may represent the most suitable structure,” Floyd said.
“For families whose primary objectives are long-term wealth preservation, succession planning, and tax-efficient transfer to the next generation, the family pension trust delivers substantially better outcomes. The tax savings alone, avoiding both 25% corporation tax and dividend tax whilst gaining contribution relief, transform the economic equation.”
The major downside, of course, is that pensions do not allow for capital access before age 55, soon rising to 57. There are also limits to how much can be contributed to a pension.
