Over the past five years, Family Investment Companies have moved from a niche planning tool used by the ultra-wealthy to a mainstream option for business owners and property investors looking to pass wealth to the next generation. A Family Investment Company — or FIC — is a private limited company set up by a family to hold and manage investments, property, or cash. It is not a special legal entity. It is an ordinary company, structured in a specific way to achieve particular tax and succession objectives.
How a Family Investment Company Works
The founder — typically the parents — incorporates a new limited company. They subscribe for different classes of shares: usually one class carrying voting rights and dividend control (held by the founders), and another class carrying economic rights (held by or for the children or grandchildren). The founder transfers assets — often cash, property, or investment portfolios — into the company.
The key structural point is the separation of control from economic benefit. The founders retain full control over the company through their voting shares. They decide when and whether dividends are paid, what investments the company makes, and how the business is run. But the economic growth in value accrues to the shares held by or on behalf of the next generation.
This separation is what makes FICs so powerful for estate planning. The founders do not need to give away control of their wealth during their lifetime — but the growth in value sits outside their estate for inheritance tax purposes.
The Tax Advantages
Inheritance tax. When the founder transfers assets into the FIC, they are making a gift for IHT purposes — specifically, a transfer of value. If the founder survives seven years, the gift falls out of their estate entirely. Even if they die within seven years, taper relief reduces the tax from year three onwards. Crucially, all future growth on those assets is outside the founder’s estate from day one.
For a business owner with a growing investment portfolio or property holdings, this can save hundreds of thousands of pounds in IHT over a decade. The nil-rate band remains frozen at £325,000 until at least 2030, so more families are being caught by IHT every year.
Corporation tax vs income tax. Investment income received by an individual is taxed at their marginal rate — up to 45% for additional rate taxpayers. The same income received by a company is taxed at the corporation tax rate. For companies with profits below £50,000, the small profits rate of 19% applies. Between £50,000 and £250,000, marginal relief applies. Above £250,000, the main rate of 25% applies. For most FICs, the effective rate is significantly lower than the founders’ personal income tax rate.
Capital gains. Companies pay corporation tax on capital gains rather than CGT. There is no annual exempt amount for companies, but gains are taxed at the corporation tax rate (19-25%) rather than the individual CGT rates of 18% or 24%.
Dividend flexibility. Different share classes allow the founders to control exactly when and how much income each family member receives. This enables income splitting across family members who may be in lower tax brackets — though anti-avoidance rules (particularly the settlements legislation) must be carefully navigated.
What Assets Work Best in a FIC
FICs work best for assets that are expected to grow significantly in value over time. The most common assets transferred into FICs include:
- Cash — the simplest option. Transfer cash and let the company invest it. No stamp duty, no CGT on transfer.
- Investment portfolios — shares, bonds, and funds. CGT may be triggered on transfer if the assets have unrealised gains.
- Rental property — particularly buy-to-let portfolios. Stamp duty land tax applies on transfer (at the higher additional dwelling rate), and CGT on any gains. This makes property transfers more expensive upfront, but the long-term IHT savings can dwarf the entry costs.
- Loan notes — the founder can lend money to the FIC instead of gifting it, retaining the right to be repaid. This provides flexibility but does not remove the loan value from the founder’s estate.
Who Should Consider a FIC
FICs are not for everyone. The setup and ongoing compliance costs — company accounts, annual returns, corporation tax filings — make them uneconomic for small amounts. As a general rule, a FIC becomes worth considering when the assets to be transferred exceed £500,000 and there is a clear long-term intention to build wealth for the next generation.
The people who benefit most include:
- Business owners who have sold or are planning to sell a business and want to shelter the proceeds from IHT
- Property investors with growing portfolios
- Families with significant investment assets who want to retain control while passing economic value
- Parents or grandparents who want to involve younger family members in wealth management gradually
The Risks and Limitations
HMRC scrutiny. FICs have attracted increasing attention from HMRC. While they are entirely legal, aggressive structures — particularly those involving minor children, artificial share valuations, or settlements legislation avoidance — are likely to be challenged.
Double taxation on extraction. Money inside a FIC has been taxed at corporation tax rates. When it is eventually extracted — usually by dividend — it is taxed again at the shareholder’s dividend tax rate. This double layer of taxation means FICs are most effective when the assets are intended to remain within the company for the long term.
Loss of personal CGT reliefs. Assets held personally may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) at 14% on the first £1 million. Assets transferred into a FIC lose access to this relief.
Stamp duty costs. Transferring property into a FIC triggers SDLT at the higher rate. For a portfolio of properties, this can be a significant upfront cost.
Ongoing compliance. A FIC is a real company. It needs annual accounts, a corporation tax return, a confirmation statement, and potentially VAT registration. These are ongoing costs that must be factored into the planning.
How to Set One Up
Setting up a FIC requires coordination between a solicitor (for company formation and share structure), a tax adviser (for transfer planning and ongoing tax efficiency), and an estate planner (for integration with your Will, trusts, and overall succession plan). The share structure must be designed carefully at the outset — changing it later can trigger unintended tax consequences.
A typical timeline from initial advice to completion is four to eight weeks. The company formation itself takes days; the careful planning that precedes it takes weeks.
The Bottom Line
A Family Investment Company is not a magic bullet. It is a legitimate, well-established planning tool that — when used appropriately — can deliver significant IHT savings, income tax efficiency, and succession flexibility. But it requires upfront costs, ongoing compliance, and careful professional advice.
The families who benefit most are those who plan 10, 20, or 30 years ahead. If your goal is to build and transfer wealth over a generation, a FIC deserves serious consideration.
If you are thinking about a Family Investment Company as part of your estate plan, contact Legacy Wills to discuss how it fits alongside your Will, trusts, and wider succession strategy.