Family Investment Companies – transferring wealth across generations

A Family Investment Company (FIC) is a corporate structure, that provides a flexible and tax efficient way to transfer wealth across generations whilst maintaining control.

In this article, we cover how to set up a FIC and the benefits of using them to transfer wealth across generations.

Setting up a FIC

Why use a FIC rather than gifting wealth to your children?

Maintain control

A key advantage of a FIC is that control can be retained by the founders, but wealth can be passed down the generations.

The directors of the FIC, who are chosen and managed by those who hold voting shares, control when dividends are paid or recommended to shareholders for declaration. The use of differing classes of shares also allows founders to control how much income is distributed to each class of shareholder, allowing flexibility as to income distribution between family members.

The articles of association are often drafted in such a way so as to restrict share transfers so the shares remain within the family either by permitting transfers down the family bloodline only so as to give an element of generational planning, or, completely prohibiting transfers outside the direct founder bloodline. This avoids potential issues with spousal transfers and the complexities that might otherwise ensue on divorce.

This type of restriction is not a panacea to protect family members involved in divorces as the family courts may still take the value of the shares into account on divorce. The value of FIC shares could be placed entirely outside the matrimonial pot, and this is usually achieved through a pre‑nuptial or post‑nuptial agreement.

In addition, the directors retain control over the company’s investment strategy, allowing long-term wealth to be managed centrally.

Tax efficient

Inheritance Tax (IHT) and Capital Gains Tax (CGT)

When you transfer assets into a trust, an Immediate Inheritance Tax (IHT) charge of 20% will apply on the amount exceeding your available nil rate band. A further IHT charge of up to 20% could also be payable if you do not survive for seven years after making the transfer.

Meanwhile, an outright gift to your children is treated as a Potentially Exempt Transfer. No IHT is payable at the time of this gift, however if you do not survive for seven years after making the gift, then it will be included in the value of your estate when calculating your estate’s IHT liability.

The benefit of a trust in this context is the on-going protection it can bring but due to the IHT restrictions on gifts into trust, they can be of limited help.

If you want to make immediate gifts to your children of high value but within a protective and managed structure, a FIC can help in these circumstances as it combines elements of both of these gifting strategies. This can be achieved by subscribing for shares at full value, restructure them as set out above and then to gift the shares which carry economic rights, while retaining voting rights. By doing this, you can make significant gifts of value via these restricted shares which would be a Potentially Exempt Transfer for IHT purposes, so no immediate IHT consequences.

You retain control via the share voting rights and being appointed as director, thereby gaining some of the attributes of a trust.

As alternative, if you wished to retain access to funds contributed to the FIC, it can initially be funded by way of a loan from you. As a result, the shares in the FIC may have little to no effective value at the outset and they can therefore be gifted to family members or a trust without triggering an immediate IHT charge and without the risk of a future IHT charge if you die within seven years of the gift. The loan could also be repaid to you over time by virtue of tax-free withdrawals.

You would not have taken any immediate steps to mitigate your IHT position. Instead this happens gradually over time as the loan is repaid, which can be used for day-to-day expenditure, and through the growth in value of the assets held by the FIC flowing to the shares you have gifted to your children, or a trust.

The shareholders may be subject to Capital Gains Tax when they dispose of their shares if they have gone up in value, even if they do not receive any proceeds, for example if they are gifted to family members. Usually this would only potentially arise once the investments held in the FIC have grown in value and/or as loans are repaid, although it would be necessary to consider this carefully in each case.

As from 6 April 2026, the Capital Gains Tax rates for individuals are 18% or 24% depending on whether they are basic, or higher/additional rate taxpayers. The Capital Gains Tax rate applicable to trustees is 24%.

Income Tax and Corporation Tax

Without a FIC structure, investment income received personally or through a trust will generally be taxed at the income tax rates.

A FIC however, is subject to corporation tax on its taxable profits at a 25% rate which is substantially lower than the higher rate (40%) and additional rate (45%) of income tax.

Additionally, expenses incurred as a result of managing the investments, investment advice, and any interest charged upon a loan made to the FIC, can be deducted from the company’s taxable income figure as an allowance expense.

Extracting value from a FIC can trigger a structural double taxation issue depending on the FIC’s sources of income. Profits inside the company first face corporation tax (up to 25%), and funds withdrawn later face personal income tax or dividend tax. Following payment of corporation tax, dividends may be distributed to the FIC’s shareholders in conformity with the dividend rights attaching to their respective shareholdings. Those dividends would be taxed at the dividend income tax rates, currently:

• 10.75% for basic rate taxpayers;

• 35.75% for higher rate taxpayers; and

• 39.35% for additional rate taxpayers.

However, if for example, the FIC is structured to largely invest in consistent dividend yielding companies, then those dividends receipts will generally be exempt from a corporation tax charge, provided they are received from UK and other qualifying territory companies. Such source of income, coupled with a longer-term plan could provide for an optimal tax structure.

Wealth extraction and long-term planning

Any wealth extraction adopted in connection with a FIC will be dependent on the respective tax position of each shareholder as well as the type of income that the FIC may receive.

If the family shareholders are non or basic rate taxpayers, dividend declarations could prove to be tax efficient. If however, they are higher or additional rate taxpayers, a longer-term plan may need to be implemented whereby profits are accrued and value realised upon a future sale and disposal of the shares, or by virtue of a members’ voluntary liquidation, resulting in a gain subject to the lower CGT rates as opposed to being subject to either income or dividend tax.

If you are considering transferring wealth to your family but wish to retain control and achieve tax efficiency, we would be pleased to advise you on whether a FIC is suitable and how we could tailor it for your circumstances. Please get in touch using the contact details below.

For further information, please contact our private client team.