Taking the complexity out of who gets what, how and when

When you want to pass on wealth to family members (or other individuals) whilst having some control over how it’s used, a Family Investment Company (FIC) offers a practical, reasonably simple and tax efficient way to do it.

A Family Investment Company is a private limited company, registered with Companies House. It is generally funded by senior shareholders (usually parents, grandparents and relatives) taking out subscription shares in the company and making loans.

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A few words on how a Family Investment Company works

These family members hold the shares with voting rights, with different levels of control set out in the articles of association. In practice this means parents (the senior shareholders) can manage the company and transfer value and responsibility to their children at appropriate times. This might be when a child reaches a certain age and/or when there will be less tax impact.

When they want to pass on their wealth, they can gift a child non-voting shares or cash for non-voting shares, to increase their portion of the company’s value. Alternatively, they could transfer some shares in the company into a trust that protects the child’s future wealth, by ensuring parents decide how and when the trust’s funds are used.

Tax advantages

A Family Investment Company has key tax advantages:

  • Provided you live at least seven years after setting up the FIC, most of its value will not count towards inheritance tax on your estate.
  • As a company, an FIC pays the lower corporation tax rate on its income, compared to the higher personal tax rates that most parents wishing to manage their wealth are liable for.
  • Most dividend income received by your FIC is not taxable unless it’s returned to the shareholders. So reinvesting that income in the FIC makes it particularly tax-efficient.
  • You could make part of your initial investment in the FIC as a loan, so if you wish to withdraw some cash later it counts as a loan repayment which is tax-free.
  • Any shareholder over 18 can receive dividends from the company up to £14,500 tax-free, depending on their taxable status. But if all the income and profits from the company are paid out to family members, some could pay tax twice – once as corporation tax when the income was received and then again on their dividends

Points to note

FICs are now often preferred to Trusts, which can be complex and more costly in terms of tax and reporting requirements. Bear in mind though that tax laws change frequently, so it’s possible that if company formation and compliance rules are revised, they could make an FIC more complicated.

It’s also worth noting that an FIC differs from the standard structure of most trading companies, so it’s wise to have specialist advice both to set it up compliantly and to ensure it gives you the greatest possible tax efficiency.

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