How can a Family Investment Company help reduce inheritance tax?

After years spent building and protecting family wealth, parents and grandparents face the daunting prospect of passing it down without losing a huge chunk to the taxman.

In last year’s Budget, more estates becoming subject to inheritance tax (IHT) prompted many families to look for ways to transfer their assets sooner to younger generations.

Trusts were once a good option for this. But since a 20% upfront charge was imposed on trusts funded with assets above the nil-rate band – the portion of an estate that can be passed on tax-free, currently £325,000 per person – they’ve been in gradual decline. 

Now, with the feeling growing that Chancellor Reeves may again target the wealthy in her upcoming Autumn Budget, it’s no surprise that interest in alternative solutions is on the rise.

Source: HMRC, Statistics on trusts in the UK November, 2024.

One structure families are considering is a Family Investment Company (FIC). 

What is a Family Investment Company?

A FIC is simply a private limited company established to hold and manage family wealth. A FIC can hold a wide range of long-term assets – for example, equities, property, bonds, cash and other investments.

As with any company, it can be structured with different share classes, dividend policies, and tax strategies. These serve as clever mechanisms to allow families to retain control of their wealth, distribute dividend income between the family, and plan for long-term succession.

For those having the ‘family investment company vs trust’ debate, what makes the FIC different is that it’s an actual company and the family themselves are the shareholders.

That means, in effect, it’s a family business, built to last generations. 

So, what are the advantages and disadvantages of a family investment company?

The advantages of a Family Investment Company

Finding tax relief

FICs are usually set up by parents or grandparents who want to reduce exposure to the 40% IHT rate.

By moving assets into a company structure, parents can take those assets outside their personal estate for IHT purposes, provided that the transfer is structured correctly and the parents do not retain a benefit in those assets. As directors of the FIC, they can still control the way those assets are managed.

FIC tax treatment is a complex area, and we recommend speaking with an adviser. A key point to be aware of is that if HMRC deems your company to be a dormant shell, or a “non-trading vehicle” that holds investments idly, it could still be subject to IHT. 

Keeping control

As mentioned, if parents and grandparents are directors of the FIC, they retain control over their assets even after they leave their personal estates. 

But it goes a step further.

A-class shares can give parents control of company policies with voting rights on matters such as signing off on dividends and how assets are managed. B-class shares, on the other hand, can be issued without voting power, to be held by children. 

Ageing parents can reduce their shareholdings gradually. They can even do this by gifting shares to their children as Potentially Exempt Transfers (PETs), if they survive seven years after the gift. And they can do this while still holding A-class voting shares and only passing those on when they die, as part of their estate.

Things to watch out for

Other forms of taxation

Although FICs can be good structures for families focused on long-term, tax-efficient succession, families making lots of transfers can be hurt badly by other taxes. 

Selling existing assets to move them into a FIC can trigger its own taxes, such as capital gains tax. Once the assets have been transferred, the FIC pays corporation tax on income and gains. And finally, when profits are distributed to family members as dividends, those individuals pay dividend tax.

In effect, the same wealth may be taxed three times: 

1. on transfer into the FIC
2. as it grows within the FIC
3. and when extracted by shareholders (family members).

For that reason, FICs tend to work best for families with long-term horizons who won’t need the money in the short-term.

Setting up a Family Investment Company

Setting up a FIC is not a five-minute job. 

It involves registering a new company with Companies House and drafting articles of association and a shareholders’ agreement. This outlines the family’s objectives with the company and the rights attached to each class of share – crucial in determining who controls decisions and how returns are distributed.

A FIC is not without its upfront tax bill, and whether it’s really worth making the drastic step – the expense and rigmarole of moving all your assets into a company structure – again comes down to the size of your estate. 

In many cases, a FIC only becomes cost-effective for estates significantly above £1 million, where the long-term savings outweigh the initial costs and ongoing administration. 

You need to see long-term tax savings comfortably ahead of costs. A 40% IHT bill on a £5 million estate – even after the first £1 million or so covered by allowances – leaves plenty of headroom above taxes and professional fees to set up a FIC.

A smaller estate may find the potential benefits marginal, especially with tax rules subject to change. It also isn’t simple to unwind a FIC if circumstances change.

Exploring Family Investment Companies further

FICs can offer a modern, flexible way to manage and pass on family wealth. If you’re considering creating one, speaking to a tax specialist or financial adviser with experience in this area is essential. 

While Charles Stanley cannot set up, or provide advice on setting up, Family Investment Companies, as an investment management firm, we can offer investment management services to established Family Investment Companies.