What is a family investment company and how does it work?

A family investment company can be a helpful way to manage your family’s wealth and pass it down to younger generations.

Find out how FICs work and whether it might be an option for your family with our guide. 

What is a family investment company? 

Just as its name suggests, a family investment company (FIC) is a company that is established to grow and protect your family’s wealth.  

FICS are usually structured as private companies with family members as shareholders. 

But not all shareholders will necessarily be the same. A major benefit of FICS is that it’s possible to issue so-called ‘alphabet shares’ where different shares carry different rights.

For example, those with ‘A shares’ may have control over the FIC (the parents), while those with ‘B shares’ benefit from profits and growth (the children).

Further shares classes, with different rights still, could be created for future grandchildren. 

FICs have grown in popularity since changes to the taxation of trusts in 2006.  

The new legislation resulted in the introduction of a new a lifetime inheritance tax charge (20%) on lifetime transfers into trusts, on any value in excess of the nil-rate band (currently £325,000).

What’s the difference between a FIC and a trust?

Both FICs and trusts can be used as a means of managing family wealth and passing it on to younger generations. 

However, the structure and tax treatment of FICs and trusts are different. 

FICs have a corporate structure - you don’t have to make gifts outright and instead can gradually distribute shares to control how wealth is distributed. 

By contrast trusts are a legal structure where trustees manage assets on behalf of beneficiaries, which may mean they offer less opportunity for control.  

Charges and tax rates maybe higher within a trust too. 

Where can family investment companies invest? 

The company structure means FICs have a pretty free rein in terms of where they invest.

This can include cash, company shares, collective investments funds and so on.

It is also possible to hold residential or commercial property in a FIC.

What are the benefits of a family investment company? 

FICs offer wealthy families a number of benefits including: 

Inheritance tax planning

Transfers into FICs will not be subject to the 20% IHT charge that may be levied on transfers into trusts.  

However, there may be further IHT benefits. If, for example, the FIC was funded by a director’s loan, that money would be invested but would not be regarded as a company asset.

This means that the FIC – and the shares that are gifted to children – carry no value and result in no IHT liability.

Any growth would then be out outside the estate for IHT purposes.

Capital gains tax would likely be payable, however, this would be at a lower rate than IHT (24% rather than 40%). 

If the FIC was funded by cash (rather than a loan), the payment would be a potentially exempt transfer for IHT purposes.

This would mean that the donor funding it would need to live for seven years before it becomes IHT free. 

Lower tax rates 

A FIC will be subject to corporation tax (paid by companies) rather than income tax (paid by individuals). 

Currently corporation tax is charged at 25% which is significantly lower than the top rates of income tax.

Corporation tax will also be charged on gains when assets are sold, rather than capital gains tax, offering a further tax saving. 

Tax-free income 

If the FIC is financed by a loan, loan repayments can provide a source of tax-free income.

Families may use this as a means of supporting their lifestyle.

The downsides of a family investment company 

There are also some potential disadvantages: 

Complexity

The main downside of a FIC is that they can be incredibly complicated, meaning professional financial and tax advice is essential.

The FIC must be structured carefully to maximise the benefits.

Your tax bill may also be higher than necessary if you are not also taking full advantage of tax-wrappers, including ISAs and pensions. 

Cost

There will be significant cost involved in setting up and maintaining the FIC to ensure it’s managed properly and meets regulatory requirements. 

Tax risks

Not only will the company pay tax on its profits, but shareholders will likely pay tax on dividends when profits are distributed, creating a double tax risk.

CGT may be payable too, if non-cash assets are transferred into the FIC.

This means careful planning is required to keep tax bills down. 

Should you consider a family investment company? 

Family investment companies are often set up when families come into considerable wealth, for example a significant inheritance or when a business is sold. 

However, while they can offer families significant tax advantages, they are usually only recommended for those with £2 million, at the very least, to invest. 

This is because the tax benefits on smaller balances wouldn’t be enough to justify the costs of running the company. 

FICs are also incredibly complicated – particularly when it comes to tax.  

This means that families will need professional financial and tax advice on an ongoing basis, not just when the company is set up. 

Before you make any decisions, it’s essential to consult a financial planner that specialises in high net worth (HNW) clients. 

They will be able to help you work out whether a family investment company is the right approach for you, or whether an alternative option, such as a trust, might be more effective. 

Although saving tax or control might be your most pressing concerns, it’s also important to take into account your personal circumstances and family dynamics.

Get expert financial and wealth planning advice

Deciding if a family investment company is right for you can be complicated, and it's easy to make costly mistakes.

That's why getting expert financial advice is so important.

Unbiased can connect you with a specialist adviser who will get to know you and your family.

They'll help you figure out if this is the best way to manage your wealth and plan for the future.