Against a potential backdrop of increasing inheritance tax (IHT) complexity, frozen tax allowances and ongoing speculation about further tax-raising measures particularly ahead of Chancellor Healey’s first Budget in October, many wealthy families are reviewing their estate planning arrangements – and the family investment company (FIC) is becoming an increasingly popular wealth planning structure for preserving family wealth, maintaining control and managing future tax exposure.
What is a family investment company?
Set up as an alternative to a trust, a family investment company is a private limited company established to hold and manage family wealth, typically comprising investment portfolios, property, cash and other investment assets. Unlike a trading company, its primary purpose is to preserve, grow and transfer wealth across generations.
A key attraction of a family investment company is the ability to separate ownership from control. The founders, typically parents or grandparents, can hold A shares carrying voting rights and retain control over the company's investment strategy, while children or grandchildren hold B shares that have rights to income and capital. The FIC can be tailored to a family’s objectives with arrangements over voting rights, dividend payments and timings and transfer of shares. This allows the senior generation to maintain oversight while facilitating the gradual transfer of wealth to future generations.
Who are family investment companies best suited for?
They are generally most suited to:
- Families with substantial investable assets, often £1 million or more
- Individuals looking to plan for potential inheritance tax liabilities
- Those wishing to transfer wealth gradually while retaining control
- Families seeking a long-term, multi-generational wealth management structure
- Business owners who have realised significant proceeds following a company sale.
What are the benefits of a family investment company?
1. Inheritance Tax planning
One of the primary reasons families establish a family investment company is to support inheritance tax planning. By gifting shares that participate in future growth to younger family members, subsequent increases in asset value can accrue outside the founder's estate, provided the gifts are structured appropriately and satisfy the relevant IHT rules.
With IHT thresholds remaining frozen and reforms to business and agricultural reliefs already being introduced, many wealthy families are reassessing their estate planning arrangements.
2. Tax-efficient investment growth
Investment returns generated within a company are generally taxed under the corporation tax regime rather than personal income tax rates. Depending on the type of asset held and returns generated, this can create a more favourable environment for reinvesting investment returns and compounding wealth over the long term. For families focused on preserving capital over several decades, the ability to retain and reinvest profits within the corporate structure can be particularly attractive. However, the overall tax position should be considered carefully, as additional tax may arise when funds are distributed to shareholders or extracted from the company.
3. Retention of control
Unlike outright gifting, a family investment company allows founders to separate control from economic benefit. The founder retains influence over investment decisions, distributions and governance through their shareholding and directorship. This is valuable where beneficiaries are young or where substantial wealth is involved.
4. Flexibility and succession planning
Different share classes can be created to reflect individual family circumstances and objectives. This flexibility makes family investment companies an effective vehicle for structured succession planning.
Why family investment companies may become even more relevant
Although no one can predict the precise contents of future UK budgets, recent tax reforms have demonstrated the government's willingness to target accumulated wealth through measures affecting inheritance tax reliefs, pensions and investment structures – meaning that their use could become more relevant and prevalent as a tool to try to preserve family wealth.
While family investment companies offer considerable flexibility, legal, taxation, administration and professional costs, they are complex structures and may not be suitable for all families. They should be implemented alongside specialist tax, legal and investment advice. Alternative solutions, including trusts, gifting strategies and pension planning, should also be considered.
To discuss whether a family investment company could support your inheritance tax and succession planning objectives, contact JM Finn at info@jmfinn.com
The information contained in this article is for general information purposes only and does not constitute financial, tax or legal advice. The suitability of any strategy will depend on your individual circumstances. You should seek professional advice before taking, or refraining from taking, any action based on the information contained in this article.
