Incoming inheritance tax changes are driving an increase in family investment companies, according to Chris Etherington, private client tax partner at RSM UK.
In a blog post, Etherington discussed how IHT changes announced in the Autumn Budget 2024 now means families are considering passing assets to the next generation sooner than they might have planned.
This would commonly involve parents making gifts to their children, according to Etherington, who said, in many circumstances, there were concerns about how to make such gifts while maintaining some control over these assets during the parents’ lifetime.
“That might be due to concerns about protecting the family’s assets over the longer-term, particularly in the case of a child getting divorced in the future.
“Or it might simply be a question of maturity, and not wanting to place significant funds directly into a child’s bank account,” he explained.
Etherington highlighted how historically trusts have been the preferred solution for this issue, but they have become more challenging for some individuals passing wealth to the next generation, due to “potential upfront tax charges that can result in a 20 per cent IHT liability, particularly on larger gifts into a trust”.
As a result of this, the use of trusts has steadily declined since 2016, according to Etherington, but the use of family investment companies has risen.
“FICs are essentially companies that hold a family’s long-term investments, including share portfolios or rental property.
“Some families are now looking at whether it makes sense for a FIC to hold shares in a family trade as well, given that full IHT relief on trading company shares will be restricted for many from April 2026.
“A typical FIC, which will just hold investments, is usually funded by subscribing for shares or making loans. These shares and loans are typically held by the children and other family members so they can benefit from the FIC in the future.
FICs are essentially companies that hold a family’s long-term investments, including share portfolios or rental property
“Parents often retain some shares to maintain control over the FIC and, as board members, they can make investment decisions and determine when amounts are distributed to shareholders,” he explained.
According to Etherington, a FIC can replicate some advantages of a trust by allowing assets to be effectively gifted to family members through the shares and loans, while retaining control during the parents’ lifetime.
“From an IHT perspective, this is efficient, as it can remove value from the parents’ estates, which might otherwise be subject to 40 per cent IHT, although this liability is transferred to another family member.
“While this might be seen as a deferral of IHT, a key benefit is that no upfront 20 per cent IHT cost arises, as it can with a gift to a trust,” he added.
Holding investments in companies could also be tax-efficient, Etherington said, since companies generally did not pay corporation tax on dividends received from shares held.
Additionally there was a “significant difference” between income tax rates and corporation tax rates, up to 45 per cent and 25 per cent respectively.
“That said, the benefits of a FIC need to be balanced against the costs of operating such a company, and the tax rules associated with a FIC can be quite complex, so they will not be appropriate for everyone.
“It’s therefore important that families review all their options carefully when considering how to transfer wealth across generations, and FICs may play an important role in facilitating this.”
alina.khan@ft.com
