Family Investment Companies: A Strategic Approach to Wealth Management and Tax Planning

In my years of practice as a corporate solicitor, I’ve witnessed the evolution of wealth management strategies, particularly for savvy business owners seeking to preserve and transfer their assets efficiently. One structure that has gained significant traction in recent years is the Family Investment Company (FIC). The main family investment company functions include facilitating asset management, tax planning, and the transfer of wealth between generations.

This sophisticated vehicle offers a compelling alternative to traditional trust structures, providing families with enhanced control, flexibility, and potentially significant tax advantages. A key step in establishing an FIC is to transfer assets—such as cash, investments, or property—into the company, often in exchange for shares or loans.

What is a Family Investment Company?

A Family Investment Company is essentially a private company, typically a UK company, established specifically to hold and manage a family’s investment portfolio. Unlike trading companies, FICs are designed purely for investment purposes, typically holding assets such as property, shares, bonds, and other financial instruments. It is best to separate the FIC from your trading company as to minimise the risk of claims from clients/customers against your investment assets.

Both cash assets and non cash assets (such as property or investments) can be transferred into the company to generate income and for wealth planning.

The structure is elegantly simple: parents (or grandparents) establish the company and subscribe for shares, often a combination of ordinary shares and preference shares. The ordinary shares, which may carry some voting rights and growth potential (i.e., the right to receive capital distributions if the company is wound up), can then be gifted to the next generation, while the founders retain preference shares that provide fixed returns and can have enhanced voting rights. Such gifts may qualify as a potentially exempt transfer, which can remove the value from the founder’s estate if the founder survives seven years.

Family members can benefit from the FIC and extract funds through loans or dividends. While most FICs are limited companies, unlimited companies are an alternative that offer enhanced privacy, as they are not required to file annual accounts with Companies House. All UK limited companies, including FICs, are required to file accounts with Companies House.

Setting Up a Family Investment Company

Establishing a Family Investment Company (FIC) is a structured process that begins with selecting the most suitable company type for your family’s needs. Most families opt for a private limited company, which offers shareholders the benefit of limited liability, but in some cases, an unlimited company may be preferred for greater privacy. The Limited Liability Partnership should also be investigated, as it does not need to pay annual corporation tax and, accordingly, may be a better vehicle for long-term investments (where you want to reinvest the profits of your investments as opposed to extract them).

Registration with Companies House is a mandatory step, requiring submission of the company’s memorandum and articles of association, as well as details of directors and shareholders. Adopting bespoke articles of association will be a crucial step to ensure that the strategy is properly implemented.

A key feature of setting up a FIC is designing a share structure that separates control from economic benefit. This allows the founder to retain decision-making authority while distributing income and capital growth to other family members. Such flexibility is invaluable for family investment and succession planning, as it enables the founder to manage the company’s affairs while gradually involving other family members in the business. It is important to note that founders can create any kind of share they want, usually done by adopting bespoke articles of association.

Family Investment Companies (FICs) Structure

The structure of a Family Investment Company (FIC) is central to its effectiveness as a wealth management tool. Typically, a FIC will have multiple classes of shares, each conferring different rights regarding income, capital, and voting. The founder often holds shares with enhanced voting rights, ensuring they retain control over key decisions and the overall direction of the company.

Other family members may be allocated shares that entitle them to receive dividend income or benefit from capital gains as the value of the company’s investments grows. This tailored approach allows families to align the FIC’s structure with their specific tax planning and inheritance tax planning objectives, ensuring that wealth can be transferred to future generations in a tax-efficient manner.

By carefully designing the share classes and voting rights, a FIC can provide a robust framework for managing family assets, balancing the need for control with the desire to share economic benefits among family members. This flexibility is particularly valuable for families seeking to protect and grow their wealth while preparing for succession.

Companies House Registration

Registering a Family Investment Company (FIC) with Companies House is a simple yet fundamental step in the formation process. It involves submitting the company’s memorandum and articles of association, along with details of its directors and shareholders. For limited companies, there is an ongoing obligation to file annual accounts with Companies House, making certain financial information publicly accessible. This transparency is often acceptable for many families, but those seeking greater privacy may consider forming an unlimited company, which is not required to file annual accounts.

The Potential Inheritance Tax Advantage

From a tax planning perspective, the FIC structure offers several compelling potential advantages over traditional wealth transfer methods. One of the benefits lies in its ability to achieve immediate inheritance tax relief through the gifting of ordinary shares to the next generation. Such gifts may be recognised as potentially exempt transfers (PETs), meaning that if the donor survives for seven years after making the gift, the value of the shares and any subsequent growth are excluded from the estate for inheritance tax purposes.

When parents gift ordinary shares to their children, they’re transferring assets and the future growth potential of the underlying assets while potentially reducing the immediate gift value through various valuation discounts. These discounts can arise from factors such as minority shareholdings, lack of marketability, and restrictions on dividend rights.

Further, the gifted shares are usually the only shares the are entitled to capital distributions, which means that they are the only shares that carry the right to receive money after the company’s assets have been sold and the company is closed. This is a key distinction when compared to the donor’s shares, which won’t have this right and therefore should not carry the value associated with the assets held by the limited company. Accordingly, the value of the donor’s shares (if structured correctly) will be minimal, and hence won’t increase the donor’s estate (for IHT purposes) unnecessarily.

However, transferring assets into the FIC can have immediate tax consequences, such as capital gains tax or inheritance tax charges, depending on the nature of the assets and the structure of the transfer. Seeking the advice of a specialist tax advisor is critical here. It is important to consider the tax consequences of transferring assets, as there may be further potential tax charges if certain conditions are not met. Additionally, FICs may not qualify for business property relief, unlike trading companies, which can impact inheritance tax planning. The impact of these strategies on personal taxation should also be considered, as individuals may face tax implications on investment income, dividends, and capital gains.

Tax Planning with Corporation Tax

Effective tax planning is at the heart of managing a Family Investment Company (FIC). The company is required to pay corporation tax on its profits, with the current corporation tax rate set at 25%. However, FICs can enhance tax efficiency by claiming corporation tax relief on allowable expenses, such as interest on loans used for investment purposes and pension contributions for directors.

Strategic tax planning can further optimise the FIC’s position. For example, the company can defer capital gains tax by carefully timing the disposal of investments, or utilise dividend stripping to manage the distribution of profits to shareholders in a tax-efficient manner. Understanding the nuances of corporation tax and the reliefs available is essential for minimising tax liabilities and maximising the benefits of the FIC structure.

By leveraging these tax planning opportunities, families can ensure that their FIC operates efficiently, preserves capital for future generations, and takes full advantage of the available tax reliefs.

Maintaining Control While Transferring Wealth

One of the most attractive features of the FIC structure is the ability for the founding generation to maintain significant control over the family assets while still achieving inheritance tax benefits. This control manifests in several ways:

Board Control: Parents typically retain majority (or sole) representation on the board of directors, ensuring they maintain decision-making authority over investment strategy and major corporate decisions.

Preference Shares: These instruments provide fixed returns to the founders but can also carry enhanced voting rights, particularly on matters affecting the preference shareholders’ interests.

Dividend Policy: The company’s dividend policy remains under the control of the board, allowing parents to manage cash flow to family members as appropriate.

This level of control addresses one of the primary concerns wealthy families have about traditional gift strategies – the fear of losing influence over their assets.

Flexibility in Asset Management

FICs offer remarkable flexibility in terms of asset management and investment strategy. FICs are typically structured to generate income and manage company profits efficiently, allowing for the reinvestment of income to maximise wealth growth and tax efficiency. Unlike trust structures, which may have restrictions on certain types of investments or require trustee consent for investment decisions, FICs operate under standard company law principles.

This flexibility extends to the ability to make further investments, borrow against assets—with the added benefit that the company may claim a corporation tax deduction for interest paid on loans used for investment purposes—and restructure holdings as circumstances change. The corporate structure also facilitates professional management, as the company can engage investment managers and advisors in its own right. While FICs are not trading companies and therefore do not benefit from certain reliefs available to trading companies, investors may also consider the enterprise investment scheme as an alternative investment strategy that offers tax incentives for qualifying investments.

Income Tax Considerations

While inheritance tax planning often takes centre stage in FIC discussions, the income tax implications require careful consideration. The company will be subject to corporation tax on its investment income and capital gains, currently at rates of 19% for most companies (or 25% for companies with profits over £250,000). Dividends received by the FIC are generally exempt from corporation tax, which can enhance tax efficiency.

However, this can still provide advantages compared to personal income tax rates, particularly for higher-rate taxpayers. When the FIC pays out profits as dividends paid to shareholders, these distributions are subject to dividend tax, with different rates and thresholds depending on the recipient’s tax band. Shareholders may face personal tax liabilities on dividends received, and further tax may arise when income or gains are distributed. This creates the potential for double taxation, as profits are taxed at the company level and again when paid out to individuals.

Capital Gains Tax Planning

The FIC structure also offers opportunities for capital gains tax planning. When assets are transferred into the company, this can sometimes be achieved on a tax-neutral basis, particularly if the company is established correctly from the outset. It is important that assets are transferred at their current market value to ensure accurate valuation, tax efficiency, and proper structuring for inheritance tax planning.

Family Investment Companies are often classified as close investment holding companies, which are considered non-trading entities for corporation tax purposes. This classification means they do not qualify for certain tax reliefs and may be subject to higher corporation tax rates. For companies with profits between £50,000 and £250,000, marginal relief provisions apply to bridge the gap between the small profits rate and the main rate of corporation tax.

Subsequently, the company can manage its portfolio to optimise capital gains tax efficiency, potentially utilising annual exemptions and timing disposals to minimise the overall tax charge.

Asset Protection

Asset protection is a significant advantage of using a Family Investment Company (FIC) as part of a comprehensive wealth management strategy. By holding family assets within a company structure, those assets are separated from the personal estate of the founder, reducing exposure to personal creditors and financial risks. This separation can be particularly valuable in safeguarding family wealth against unforeseen events such as bankruptcy or divorce.

A FIC can also be structured to protect vulnerable family members, ensuring that assets are managed responsibly and distributed according to the family’s wishes. In some cases, integrating trusts or other estate planning tools with the FIC can provide additional layers of protection and flexibility.

Ultimately, a well-structured FIC not only facilitates family investment and succession planning but also serves as a robust vehicle for asset protection, helping to secure the family’s financial legacy for generations to come. Seeking professional advice is essential to ensure that the FIC is tailored to meet the family’s specific asset protection objectives and complies with all relevant legal and tax requirements.

Succession Planning Beyond Tax

While the tax advantages of FICs are significant, their value extends beyond mere tax planning. These structures provide an excellent framework for succession planning and family governance.

The corporate structure naturally facilitates the gradual transition of responsibility to the next generation. Younger family members can be appointed as directors, gaining experience in investment management and family asset stewardship. This process helps ensure that the family wealth is managed competently across generations.

Potential Drawbacks and Considerations

Despite their advantages, FICs are not suitable for every family situation. The structure requires ongoing compliance with company law obligations, including filing annual returns, maintaining proper corporate records, and meeting annual tax liabilities such as the Annual Tax on Enveloped Dwellings (ATED) for high-value residential properties. There are also costs associated with professional management and administration, although FICs may be able to claim tax relief on certain allowable expenses, such as interest on loans used for investment purposes.

Furthermore, the company structure may not provide the same level of asset protection as certain trust arrangements, and the tax advantages depend on the specific tax treatment of FICs compared to other structures, as well as the prevailing tax legislation. FICs are required to pay tax on their profits, which is an important consideration in their investment strategy.

The Importance of Professional Guidance

Establishing and operating a Family Investment Company requires careful planning and professional expertise. The structure must be designed to meet the family’s specific objectives while ensuring compliance with all relevant legal and tax requirements.

In my practice, I work closely with tax advisors, accountants, and investment managers to ensure that FIC structures are implemented correctly and continue to operate effectively over time. The complexity of the relevant legislation means that professional guidance is not just advisable – it’s essential.

Looking Forward

As tax legislation continues to evolve, particularly around inheritance tax and wealth transfer, the FIC structure remains a valuable tool in the estate planner’s arsenal. However, families considering this approach should act thoughtfully and with proper professional guidance.

The key to successful implementation lies in understanding that a Family Investment Company is not merely a tax planning vehicle – it’s a comprehensive approach to family wealth management that can provide benefits for generations to come.

For families with substantial assets seeking to balance tax efficiency with control and flexibility, the Family Investment Company represents a sophisticated solution that merits serious consideration as part of a comprehensive wealth management strategy.

Malcolm Zoppi is a specialist corporate solicitor with experience in family wealth structuring. For more information about Family Investment Companies and other wealth management strategies, please email Malcolm at malcolm@zoppi.co.uk.