Nick Wright provides an introduction to family investment companies, examining their structure, purpose and growing popularity as wealth transfer vehicles.
Learn more about this topic with the tax saving report, Sharing Wealth Using Family Investment Companies. Save 40% today!
What is a family investment company?
A family investment company (FIC) is a private company (limited or unlimited) established to hold and manage a family's investment assets, typically with the aim of passing wealth to future generations in a tax-efficient way, while retaining control.
There is no statutory definition of an FIC, either in tax or corporate law, which reflects how varied these structures can be. However, most share several common features. Shareholders are usually members of the same family across two or more generations. The company does not trade but holds investments such as stocks and shares, property or other assets. There are typically multiple classes of share, with different rights attached depending on the age or generation of the shareholder. Older generations commonly retain voting control, while younger generations hold rights to income or capital on winding up.
This distinguishes an FIC from a standard trading company, which generally has a greater level of day-to-day activity. In contrast, an FIC often passively holds assets for long-term preservation and intergenerational transfer. However, this is a generalisation; for example, an FIC may be a holding company of a trading subsidiary.
A brief history
FICs are not a new invention, but their popularity has grown considerably over the past 15 years. A number of factors have driven this.
First, the changes to trust taxation introduced by Finance Act 2006 made most lifetime transfers into trust immediately chargeable to inheritance tax (IHT) where they exceed the nil-rate band, currently £325,000. This reduced the attractiveness of trusts as a wealth-transfer vehicle for substantial sums.
Second, corporation tax rates have fallen gradually since 2006. At that time, the main rate of corporation tax was 30%, falling to 19% by 2023. Although the rate has since increased to 25%, this remains significantly lower than higher rates of personal tax, which is particularly relevant giventhat many FICs are intended to retain and build wealth within a corporate wrapper, making companies a relatively efficient structure for investment income compared with personal ownership at higher rates.
Third, restrictions on mortgage interest relief for individual landlords (phased in from April 2017) pushed many property investors to consider corporate ownership.
Fourth, two further IHT developments have prompted clients to revisit their planning. The capping of 100% business property relief and agricultural property relief at £2.5m per individual from 6 April 2026, enacted by Finance Act 2026, has reduced the attractiveness of holding substantial business wealth in trading company form. Separately, proposals to bring most unused pension funds within the scope of IHT from 6 April 2027 are prompting clients to reconsider how retirement planning and estate planning interact. Although neither change directly affects FICs, they diminish some of the principal alternative wealth-preservation wrappers and push the balance toward corporate structures.
HMRC have been acutely aware of this trend. In April 2019, they established a dedicated team to research the use of these structures. That team was disbanded in 2021, with HMRC concluding in its report that there was no correlation between FIC use and non-compliant behaviours. FICs are now dealt with as ‘business as usual’ within HMRC's wider compliance work.
The main benefits
FICs can offer numerous tax and commercial advantages when designed properly. Some of the primary benefits are:
-
Control - Directors retain day-to-day management while shareholders hold economic rights. This separation is particularly attractive where a founder wishes to pass value to younger family members without relinquishing decision-making authority.
-
Tax efficiency - Corporation tax on investment profits is generally lower than higher or additional rates of income tax. Dividend income received by a UK company is usually exempt from corporation tax, and reinvested profits compound more efficiently within the corporate wrapper.
-
Intergenerational wealth transfer - By gifting shares to children or trusts, or by issuing growth shares at the outset, founders can reduce the value of their estate while retaining control through separate voting shares or suitable provisions in the articles of association.
-
Flexibility - Unlike a trust, an FIC is not within the relevant property regime, so it avoids the 10-year anniversary and exit charges that can apply to discretionary trusts for IHT purposes.
Who typically uses an FIC?
HMRC's 2019–2021 research found that the average FIC held assets of around £5m, and most founders were aged 50 or over. The typical user is therefore a wealthy individual or family, often with a combination of property and investment assets, looking to pass wealth to the next generation in an ordered way.
Perhaps the three most common profiles of FIC owners in practice are:
-
business owners who have sold their trading company and wish to invest the proceeds for future generations;
-
families with substantial property portfolios (buy-to-let or commercial) who want to move away from direct personal ownership; and
-
high net worth families with diversified investment portfolios seeking greater control and planning flexibility than outright gifts or trusts permit.
It is worth noting that FICs are less commonly used at the very top of the wealth scale, where family offices and more bespoke structures tend to dominate.
In my experience, tax is rarely the sole reason for setting up an FIC, and advisers should resist framing it as such. Many clients value the commercial benefits, such as a unified investment vehicle that consolidates family wealth, clearer governance arrangements, a framework for training the next generation in financial stewardship, and a mechanism for structured lifetime gifting without the all-or-nothing character of an outright transfer. Where the non-tax benefits are strong, marginal tax efficiency becomes secondary. Equally, where the non-tax rationale is weak, tax savings alone rarely justify the additional complexity. Of course, where these non-tax reasons outweigh the tax benefits, there is a stronger argument that any anti-avoidance provisions are less likely to apply, given that most anti-avoidance provisions rely on an intention to obtain a tax advantage.
Basic structure
A typical FIC is incorporated with a bespoke set of articles of association and, ideally, a supporting shareholders' agreement. The share capital is divided into multiple classes to achieve the desired combination of control, income and capital rights.
A common arrangement is:
-
voting shares held by the founders, and possibly their spouse, carrying full control but limited or no rights to income or capital beyond the paid-up amount;
-
income shares held by adult children or family trusts, carrying rights to dividends and usually at least some element of capital;
-
growth shares held by children or grandchildren, entitled to capital growth above a defined hurdle value.
The articles will usually restrict share transfers to family members, and the shareholders' agreement will set out reserved matters, dividend policy and exit arrangements. It is important to emphasise that these documents are the backbone of the structure; failure to invest time at the outset often causes problems many years later.
HMRC's approach
Although HMRC no longer has a dedicated FIC team, implementing FIC structures requires careful tax planning, as we will see in future articles in this series, in particular in relation to anti-avoidance provisions. Minutes of the HMRC Wealthy External Forum in May 2021 make clear that FICs were considered to create tax risks and compliance activity across a variety of tax regimes, including IHT, capital gains tax, SDLT and corporation tax.
Advisers should assume that HMRC continues to scrutinise FIC arrangements, particularly where the structure has obvious tax advantages.
Future articles
This is the first of a five-part series; the next four articles will examine the practical issues arising at each stage of an FIC's lifecycle.
Article two will address setting up and funding an FIC, including share class design, the tax consequences of different funding routes, and the pitfalls of transferring assets into corporate ownership.
Article three will consider the operation of an FIC, including the taxation of investment income, extraction of value by the family and the interaction with the settlements legislation.
Article four will examine the long-term IHT and succession planning benefits, with particular focus on freezer and growth shares, comparison with discretionary trusts and the availability of business property relief.
Article five will consider whether an FIC is as tax-efficient as they are often assumed to be, particularly over the longer term, where future generations may have different priorities when children each have their own family unit to consider.
Practical tip
Before recommending or implementing an FIC, advisers should pause and consider whether the structure genuinely meets the client's needs over the long term. FICs are not a universal solution, and a simple lifetime gift, bare trust or discretionary trust may serve some families better. Where an FIC is appropriate, bespoke articles of association and a properly drafted shareholders' agreement are essential. Cutting corners at incorporation almost always costs far more to fix later.
