Family Investment Companies (FICs) A complete guide

Advantages of a Family Investment Company

Before delving into the details, it’s important to note that a Family Investment Company functions like a regular company. Whilst it offers flexibility in structure, it must adhere to standard tax and regulatory requirements. There are several ways to establish a FIC. However, to avoid overcomplication, I’ll cover one of the most common approaches to using a FIC for investing wealth, along with its potential benefits and drawbacks. As always, it’s best to consult a financial adviser to choose the right structure for your needs. 

The structure of a Family Investment Company – maintaining control

One of the advantages of setting up a FIC is the ability to create different types of shares that can separate control from financial benefits. These shares, often called ‘alphabet shares’, are categorised into Type A shares, Type B shares and so on.  

Type A shares can be created to give the shareholder voting rights, so they can make decisions for the company. However, they commonly don’t provide any benefit to the growth of the investments within the company. In contrast to this, Type B shares might give members the right to the company’s profits and growth, but without giving any control over operations. Only the Type A shareholders (usually the parents in a family) could, for example, decide when to make distributions to the other shareholders. It effectively provides a similar scenario to the traditional role of a trustee and beneficiary, helping Type A shareholders maintain control of their assets whilst still being able to access the original capital, if needed. 

Protection from divorce

The structure of a FIC can be tailored so that these shares are only transferable to direct family members. This can help ensure that your wealth is protected from things like divorce or bankruptcy. 

Inheritance Tax

As aforementioned, another significant benefit of a FIC is its potential to minimise inheritance tax. If you finance the FIC through a director’s loan, the funds can be invested within the company, but the loan will not be a net asset on the company’s balance sheet as it is a loan. As such, the effective value of the FIC is zero. If you then gift shares in the company, at this point, to your children, the shares also have a nil value as no growth has occurred yet. As a result, no inheritance tax liability is caused when you make the gift. Your beneficiaries can then benefit from any future investment growth completely free of IHT as it will be immediately outside of your estate.  

The downside to this is that the full value inherited is likely to be subject to Capital Gains Tax (CGT). This is currently charged at a lower rate than IHT (24% instead of 40%).[1] [2] However, your tax adviser, solicitor and financial planner should work on plans for the loan to be repaid, or written off, before you die. This would then allow the full value to be passed down without incurring IHT. There are a range of options available with this and it can be complicated so getting advice is essential.  

Effective tax-free withdrawals

Additionally, financing the FIC through a loan also allows you to make effective tax-free withdrawals by accessing your original capital through loan repayments. This then becomes a helpful route to provide a tax-free income to support your lifestyle alongside any other investment vehicles you might have. 

Traditionally, trusts have been used for this process. However, unlike trusts, FICs don’t incur a 20% entry charge when transferring assets above your nil rate band of £325,000.[3] This makes them particularly useful for people who have come into large lump sums and want to structure them tax-efficiently, such as those that have sold their business or received a large inheritance.  

Tax efficiency

A FIC can also offer greater tax efficiency. At the company level, a FIC is subject to corporation tax at a rate of 25% on all taxable profits.[4] This is significantly lower than the top rates of income tax, and CGT does not apply to investments within the FIC. In addition, most dividends generated by UK investments within the FIC will be exempt from corporation tax. A FIC can also offset allowable expenses against its profits such as investment management or accountancy fees.  

Compare the tax treatment of a FIC to a trust and this is significantly lower than the 45% income tax rate that trusts typically attract combined with the 24% CGT that they incur.[5] They also have a limited ability to offset costs.   

When it comes to shareholders, the tax treatment works differently. When dividends are distributed to shareholders, these are subject to income tax based on the individual’s marginal rate. There is a £500 tax-free allowance for dividends.[6] For basic-rate taxpayers, this could mean paying as little as 8.75% on those dividends, which children and young adults often are. 

Charitable giving

When setting up the company, you can also incorporate charitable giving into its structure. For instance, you might choose to donate 5% of the company’s profits each year or ensure the company invests in ethical and responsible projects. These charitable donations can be counted as a business expense, which can reduce the company’s tax liability. 

Disadvantages of a Family Investment Company

Like any financial vehicle, there are a few things to consider before setting up a FIC. There are additional professional and regulatory costs associated with running a company. Both at inception and annually. For example, you are required to file accounts with HMRC which will typically incur accountancy fees.  

A FIC can become less tax-efficient without careful planning. If not used alongside other tax-efficient options like ISAs, pensions, or general investment accounts, you may face higher taxes and fees. A FIC isn’t a replacement for these options, but a complementary tool.  

Another consideration is the risk of double taxation. First, the company pays tax on its profits, and then shareholders pay income tax on their dividends. However, this would be reduced if profits are distributed to family members in lower tax bands and individual tax allowances are used. It’s also important to note that transferring non-cash assets into a FIC may trigger CGT and other tax implications. To avoid complications, it’s generally best to set up a FIC with cash assets.  

How to set up a Family Investment Company

Setting up a Family Investment Company can offer significant tax benefits and help protect and grow your wealth, but it’s not for everyone. It can be an extremely complex endeavour, and really does depend on your tax situation, level of wealth, personal circumstance and financial competence. To set up a FIC and ensure it’s the right move for you, seeking advice from a qualified financial adviser and a Chartered Tax Adviser is crucial.