With chancellor Rachel Reeves’ spending review doing little to assuage fears over future tax rises, families are looking for new ways to protect their money.
Trusts used to be the default option for individuals wanting to reduce their inheritance tax (IHT) liability when passing on wealth while retaining some control over their gifted assets. However, the tightening of trust rules in recent years has meant interest in family investment companies (FICs) has grown.
This only looks set to increase, particularly as the Labour government’s IHT reforms take effect. Demand for FICs accelerated before the Autumn Budget and has remained high ever since, according to advisers, who have seen an uptick in instructions.
“Looking ahead, we expect momentum to grow post-April 2026, when business assets may for the first time be exposed to inheritance tax, with current 100 per cent relief potentially reducing to 50 per cent,” said Tabitha Collett, a senior associate at law firm Charles Russell Speechlys.
“That, alongside other relevant tax points (including the government’s commitment to cap corporation tax for the life of the parliament and the increase in capital gains tax for individuals), has made FICs more appealing and could further increase demand as families look for alternative structures to support inheritance tax planning,” she added.
What is a FIC and is it right for me?
A FIC is a private limited or unlimited company that can be used as a vehicle to control, invest and distribute family wealth. Parents or grandparents set the company up and transfer the assets they would like to pass on to their children to the company.
“FICs enable shareholders (often family members) to hold different classes of shares with varying rights,” explained David Little, a partner in financial planning at wealth management firm Evelyn Partners.
Parents or grandparents can set the company up, so they hold voting shares, allowing them to retain control over the direction of the company, while their children, grandchildren or other family members are granted non-voting shares.
Carefully drafted articles of association and shareholder agreements can add another layer of protection for individuals concerned about conceding control of their assets.
“The key IHT advantage of a FIC lies in the ability to gift value while retaining control,” said David Denton, head of technical services at Quilter Cheviot. “Typically, parents (the founders) retain shares with income rights, while gifting growth shares to children.”
This can be particularly tax efficient if shares are granted to grandchildren or younger children, as they are less likely to have made use of their allowances.
Additionally, there is no cap on how much can be transferred to a FIC. By contrast, if an investor sets up a discretionary trust, a 20 per cent inheritance tax charge would apply to any amount transferred above the £325,000 nil-rate band.
However, FICs are complex vehicles to run, and before setting one up, it is sensible to consider whether alternatives such as trusts, or offshore bonds are a more suitable option.
Their suitability may sometimes depend on an individual’s familiarity with company structures. For those with a business background, FICs might feel like more familiar territory.
“For those who are most comfortable in a boardroom setting, they already speak the language of a FIC making it much easier for them to conceptualise the approach,” said Edward Robinson, a legal director at Charles Russell Speechlys.
The amount an individual wishes to transfer will also be an important factor when considering whether a FIC is suitable. While FICs were once the preserve of the ultra-wealthy, they have become an option that is “increasingly viable for those who are not ultra-high net worth”, Robinson said.
Although, given the costs associated both with setting up and administering a FIC, he added “we typically do not see FICs holding value of much less than £3mn, although there is no hard and fast rule”.
Drawbacks to FICs
FICs do have some distinct disadvantages. Firstly, there is the issue of double taxation. Any profits made by the FIC will be subject to corporation tax, and shareholders themselves will be liable to pay income tax on any dividends received at their marginal income tax rate.
Winding up a FIC can also incur significant taxes, so investors need to be prepared to invest for a reasonably long period to make it a cost-effective option.
It is also necessary to factor in the costs involved both to set up and run a FIC, as well as the significant administrative burden these vehicles come with. For example, annual Companies House filings and account preparation will need to be completed, along with a host of compliance and governance measures.
They are not a hands-off investment vehicle, so they should only be considered by those who have the time and resources to manage them actively.
