What is a family investment company?
A family investment company (FIC) is a private company limited by shares, used to manage wealth, invest assets, and transfer wealth between generations.
FICs offer tax efficiency, wealth management, and succession planning benefits. The legal structure gives shareholders limited liability protection, separating your personal assets from the company's assets and safeguarding your wealth.
By 2021, over 10,000 had been registered in the UK with Companies House. Now in 2024, we're finding that awareness of and interest in them continues to increase.
You can consider that FICs have three main components: the shareholders (your family members), the directors (often you or senior family members), and the assets (property, stocks, cash, or business interests).
How do family investment companies work?
In simple terms, you transfer assets into the company by selling or gifting them. The company issues shares to family members, making them shareholders. Different share classes allocate voting rights and economic benefits among different shareholders.
The result is that you maintain control while distributing wealth.
For instance, if you were setting up a FIC, you might hold voting shares while your children hold non-voting shares with economic rights. This arrangement allows you to retain decision-making power over the company's investments and operations while your children benefit financially from the company's success without having a say in its management.
Funding a family investment company
You can fund a family investment company through cash investments, property transfers, or loans from family members. Each method carries distinct tax considerations.
Cash investments offer simplicity but may not maximise tax efficiency. Property transfers can trigger capital gains tax, while loans might incur income tax on interest payments.
As an example: You transfer a property worth £1 million into your FIC. This action could result in a capital gains tax liability now if the property has appreciated since you acquired it. However, the FIC might benefit from future rental income and potential capital growth. Over time, this could lead to significant wealth accumulation within the corporate structure, potentially reducing your overall inheritance tax liability.
Share structure and voting rights
FICs use different classes of shares to allocate voting rights and economic benefits among family members - ordinary, preference, and alphabet shares.
You use the different classes to control decision-making power and distribute profits. Ordinary shares typically carry voting rights and entitle holders to dividends. Preference shares often have priority for dividend payments but may lack voting rights. Alphabet shares allow for varied dividend rights among shareholders.
Tax implications of family investment companies
FICs can offer significant tax advantages over holding assets in your name personally (on average a 25% reduction in tax overall). But you need to understand the taxes that affect them and how they play against each other.
Tax savings stem from lower corporation tax rates and flexible profit distribution options. FICs pay corporation tax on their profits at rates lower than personal income tax (and dividend income tax at higher rates). You can then choose how and when to distribute profits to other family members, allowing for tax-efficient planning (note that dividends paid to children under 18 are taxed on the parents).
Inheritance tax considerations
You can use a FIC to reduce your inheritance tax liability by up to 100% on transferred assets. This compares favourably to outright gifts or trusts.
Gifts of any sort made during your lifetime become completely free from inheritance tax after seven years. By gifting shares over time to family, you pass on control of the assets gradually, while making the most of the seven year window (and its tapers).
Corporation tax treatment
Like all companies, FICs pay corporation tax on their profits (in 2025/26, the rate is 25% for profits over £250,000 although some FICs may be considered close investment holding companies and taxed at 25% regardless of the size of profits). This rate sits significantly below the top personal income tax rate of 45%. The lower tax burden can speed up wealth accumulation within your FIC.
An FIC may also be able to claim corporation tax relief on loans made to it against the value of investments, where the loans are genuinely for business purposes.
Let's look at a numerical example to show the tax advantage. If your FIC earns £500,000 in profit, it would pay £125,000 in corporation tax. In contrast, if you earned this profit personally at the highest rate, you'd face an income tax bill of £225,000. This £100,000 difference stays in your FIC, ready for reinvestment or future distribution.
Capital gains tax implications
FICs pay corporation tax on capital gains at 25%, compared to individuals who pay personal capital gains tax rates of up to 28%. This can be advantageous for long-term investment strategies. When your FIC sells assets or reinvests gains, it can lead to compound growth over time.
Consider this scenario: Your FIC sells an asset for a £1 million gain. It would pay £250,000 in tax. If you sold the asset personally, you'd pay up to £280,000. This £30,000 difference remains in your FIC, potentially growing further.
Benefits for wealth management
FICs offer a flexible framework for wealth management. You can transfer assets to future generations, maintain control over investments, and potentially reduce your tax burden. They give more control than trusts and can be particularly beneficial for managing a family business.
A FIC could hold your family business shares and distribute profits to members of your family through dividends. For instance, if you owned a successful manufacturing company, you could transfer the shares to a FIC. You'd retain voting rights, ensuring control over business decisions, while your children receive non-voting shares, allowing them to benefit from the company's success without direct involvement in its management.
Legal considerations
When setting up a FIC, you'll need to consider company formation, drawing new articles of association, and putting in place a shareholders' agreement. Clear documentation can help prevent future family disputes and significantly reduce the risk of litigation.
Company formation is relatively simple using an online registration agent. You won't be able to change from the model articles of association, which outline the company's internal rules, to some that are more appropriate, so you'll need legal help after formation.
Shareholder agreements define the rights and responsibilities of family members involved in the FIC.
An agreement cost between £3,000 and £20,000, and while this sum may seem substantial, a well written one ensures your FIC is properly structured and legally sound for the long term.
Structure
A FIC can have various structures - particular to your family dynamics, long-term goals, and tax implications.
About 60% of FICs use a holding company structure for added flexibility. The structure you choose should fit your family's specific needs.
For example, your structure might include a holding company with subsidiary companies for different asset classes or business interests.
For instance, you could set up a holding company that owns subsidiaries for property investments, stock portfolios, and family businesses.
For tax planning, some subsidiaries might be outside of the UK.
Asset diversification
A FIC can hold and manage a variety of assets: cash, property, stocks, bonds, business interests, and intellectual property.
A significant 40% of FICs maintain a mix of property and investment portfolios, while 30% concentrate primarily on business assets. Diversifying assets within your FIC can help you manage risk to any one asset class.
Asset protection from creditors
Another advantage of a FIC is asset protection from creditors. Once transferred, assets belong to the company, not to you. As such, you can shield up to 100% of transferred assets from personal creditors and ring-fence up to 90% of family wealth from divorce settlements.
Control mechanisms
There are various ways to maintain control of the assets. You can use share structures, directorship appointments, and shareholder agreements to guide investment strategy and protect family interests.
In fact, 75% of FICs keep majority control with the founding generation through voting rights.
You might structure control like this: you retain 60% of voting shares, giving your two children 20% each of non-voting shares. This lets you stay in charge while your kids benefit economically.
Managing family dynamics
Having established a FIC, you might find yourself facing some previously unencountered challenges with family relationships.
To manage family dynamics effectively, you can implement several strategies. Regular family meetings help open communication and transparency. Clear decision-making processes can prevent misunderstandings and power struggles. When conflicts arise, professional mediation can offer an impartial perspective. And a family council or board of directors can provide structure and oversight.
As an example, lets look at how a family council might work. You could set up a council with representatives from different branches of your family. It would meet quarterly to discuss investment strategies, review performance, and address any concerns. You'd chair the meetings, with your spouse and adult children as voting members. Your parents might serve as advisory members, offering their wisdom without voting rights.
Family investment companies vs trusts
FICs and trusts are two distinct structures for managing family wealth.
FICs give you more control over assets and offer greater tax efficiency. Trusts, on the other hand, provide stronger protection of assets but with less flexibility.
Your choice between a FIC and a trust depends on your family's specific needs.
If you want to retain control while minimising tax, a FIC might suit you better. For instance, if you've just inherited a family business and wish to involve your children in its management, a FIC allows you to allocate shares and voting rights as you see fit. Conversely, if protecting assets is your primary concern, perhaps due to members of your family who have financial difficulties or who lack capacity to manage shares, a trust might be more appropriate.
Creating and setting up a family investment company
The process for creating a FIC can range from 4 to 12 weeks, depending on the complexity.
First, you plan and set goals. You choose the company structure and select directors and shareholders.
Next, you'll need to have new articles of association and shareholder agreements drafted. The 'model' articles that nearly all companies use when they are first registered won't deal with control of the company. The shareholders agreement needs to complement the articles and set out more private issues such as what happens when a shareholder dies.
You would then register the company at Companies House and open bank accounts. Company registration can take as little as 24 hours.
Then, you transfer assets and implement investment strategies.
Professional advice is key throughout the process.
Investment strategies for long-term growth in family investment companies
Family investment companies can use various investment approaches to achieve long-term growth and wealth preservation. These include portfolio diversification, value investing, growth investing, income generation, and sustainable investing. FICs with diversified portfolios have shown average annual returns of 7-9% over the past decade. You can adopt a mix of these strategies to suit your family's financial goals and risk tolerance.
Potential drawbacks of family investment companies
Setting up and running a family investment company can be complex and come with costs.
You'll face setup expenses ranging from £3,000 to £20,000, depending on your FIC's structure. Annual running costs can reach £3,000 to £10,000, based on size and complexity. These figures reflect the need for professional advice and ongoing management.
FICs require active management and can spark family disputes. Tax legislation changes might affect their benefits. But you can mitigate these drawbacks. Proper planning and expert guidance often make the benefits outweigh the challenges. Your specific circumstances will determine if an FIC suits you.
FICs are not for all assets
Certain investments might be better held in an alternative structure if there are specific tax incentives related to them, such as the Enterprise Investment Scheme (EIS) or Business Property Relief (BPR).
A residential property valued at over £500,000 and held in a FIC is likely to be subject to the Annual Tax on Enveloped Dwellings (ATED).
HMRC's view on family investment companies
HMRC established a specially dedicated Family Investment Company unit in 2019 to examine their use.
The unit concluded its review in 2021, finding no evidence of correlation between FICs and non-compliant behaviour. Effectively, FICs were concluded to be a legitimate wealth management tool. However, HMRC continues to monitor FICs closely, focusing on proper structuring and documentation to ensure compliance with regulations.
You must maintain transparency and proper record-keeping to avoid potential issues with HMRC.
Ensure all transactions within your FIC are properly documented and can be justified as being in the company's best interests.
For example, if you're considering using your FIC to purchase a holiday home, you'd need to demonstrate how this investment aligns with the company's objectives and benefits all shareholders fairly.