How Are Family Investment Companies Taxed on Their Investments?

Peter Rayney explains the ongoing accounting and tax treatments for typical investments made by family investment companies. 

Family investment companies (FICs) are now increasingly used for succession and estate planning. As I now get lots of accounting and tax questions about the various types of investments made by FICs, I thought it would be useful to examine the more prevalent points for our readers.  

Accounting background 

FICs normally record their investments in the balance sheet as fixed asset investments. Such investments are generally purchased for long-term growth with the view to enjoying dividend or interest income on a regular basis (see below for treatment of regular share dealing profits). 

Under UK generally accepted accounting principles (GAAP), FICs generally account for their investments in various ways, depending on the nature of the investment held. The accounting treatment is important since it will often (but not always) determine the tax treatment of profits and losses. 

Main types of FIC investments 

Basic financial instruments (BFIs) – BFIs would cover debt instruments such as bank balances and bank loans, gilts, Treasury Bonds, ‘vanilla’ loan instruments as well as investments in most ordinary shares (see FRS 102, section 11). 

A BFI must have a fixed or determinable return and not be derivative in nature. BFIs are normally recorded at their original cost with adjustments for repayments and impairments. This treatment is often ‘the amortised cost basis’. 

GAAP requires all assets to be tested for impairment at each financial reporting date. This means that if (say) a loan asset is worth less than it was acquired for, it is written down by an appropriate amount, with the write-down being charged to the profit and loss account.  

BFIs often fall within the loan relationship rules for corporation tax purposes (CTA 2009, Pt 5). This means that loan relationship debits and credits flowing through the profit and loss account or the statement of other comprehensive income (OCI), such as impairment of a debt asset, would generally be allowed and taxed for corporation tax purposes (unless they are dealt with by special tax rules). This is referred to in the tax legislation as the ‘amortised cost’ basis. 

Non-basic financial instruments (non-BFIs) – FICs have the option to account for all their non-BFIs at fair market value (provided this can be reliably measured) (FRS 102 – section 11.14(b). This treatment is often termed FVTPL (fair value through profit and loss account).  

Again, the tax recognition of the accounting losses and profit (as a result of movements between fair values in opening and closing balance sheets) would be reflected for tax purposes under the loan relationship regime. Thus, for example, unrecognised gains are taxable. 

   Listed equity shares or funds – As a general rule, these are BFI’s and are normally accounted for at fair value (FVTPL - see above) since their market values can be reliably measured from the stock markets.  

Thus, listed shares, etc., are valued at fair value at each balance sheet date, with the valuation movements (increase or decrease amounts) being credited or debited to the profit and loss account.  

However, the relevant accounting entries for listed shares are effectively ignored for UK tax purposes, since they fall to be dealt with under the capital gains regime. Consequently, gains and losses are only recognised for tax purposes when the listed shares are sold (subject to any special corporate gains reliefs, such as the substantial shareholdings exemption (SSE)). 

FICs are particularly tax-efficient vehicles for investing in listed shares, since dividend income received from such shareholdings is generally exempt from corporation tax (CTA 2009, Pt 9A). 

Example 1 – Corporate gains on sale of shares held as investments

On 8 July 2025, Fleming Investments Ltd sold 5,000 out of the 8,000 £1 ordinary shares it held in Ted plc for £875,000. The holding of 8,000 £1 shares was purchased on 3 June 2000 for £452,000.  

The chargeable gain on the disposal is £452,000, calculated as follows: 

• Unlisted shares in private companies – Unlisted shareholdings in private companies are generally recorded at cost but ‘tested’ for any impairment to value (with any material or permanent impairment below original cost being charged against the profit and loss account). 

As with listed shares, unlisted shares are taxed under the corporate capital gains regime on a ‘realisation only’ basis.  

Trading in shares or share dealing 

Some FICs may also have a share dealing trade, where shares or securities, etc., are purchased on a frequent basis with the view to making short-term profits from market fluctuations. At the balance sheet date, these kinds of purchases would be classified under ‘trading stock’.  

Shares that are held as trading stock do not fall within the capital gains regime. Consequently, trading profits and losses on share dealing activities are calculated in accordance with the GAAP, subject to any specific tax rules (CTA 2009, s 46). This means that the accounting policy choice would influence the tax treatment. 

Trading profits on share trading are subject to corporation tax in the same way as any other trading activity. Relief should be available for net trading losses arising from trading in shares (subject to any specific loss relief restrictions). 

Example 2 – Listed shares held as trading stock  

In the year ended 31 October 2024, LOD Ltd sold and purchased a number of listed shares in the course of its share dealing trade, producing a trading profit of £945,000. All the listed shares held by the company are accounted for as trading stock. 

All the shares held at 31 October 2024 are carried at their original cost.  

However, two shareholdings were standing at a loss compared with their prevailing listed price, shown as follows: 

Therefore, the reported trading profit for the year ended 31 October 2024 that will form part of the company’s corporation tax profits (before any other adjustments) for that period will be £867,300, being: 

Corporation tax for FICs 

The vast majority of FICs would be subject to the current main corporation tax rate of 25%.  

Many FICs are likely to be close investment companies (CICs) within CTA 2010, s 18N and hence cannot benefit from the small profits or marginal rate relief.  

Exceptionally, property investment companies that mainly let properties to third parties should fall outside the CIC definition and should be able to use the 19% small profits rate if their taxable profits fall below the annual £50,000 limit (apportioned between ‘associated companies’).  

It is useful to look at the overall effective tax rates (rounded) for dividends drawn from a FIC in 2025/26. The table below assumes corporation tax at 25% under various scenarios: 

Practical tip 

HMRC will often disallow all or a large part of a large director’s salary or bonus for corporation tax purposes unless it is clearly tied to the management of the FICs investment portfolios or the administration of the FIC.