What is a family investment company (FIC) and is it good for IHT?

Full answer

A family investment company (FIC) is a private limited company established specifically to hold and grow family wealth -- typically shares, bonds, investment funds, or property. It is used as an alternative to a trust for IHT planning, particularly for families with larger estates. Typical structure: the parents (founders) subscribe for different classes of shares with different rights. The parents often hold preference shares (with priority on capital but no growth) or ordinary voting shares, while children or grandchildren hold ordinary growth shares (which receive all future value appreciation). Parents then fund the company by lending it money (a director's loan) or subscribing for shares. Investment growth accrue to the shares held by the next generation -- outside the parents' estate from inception. IHT position: the loan from parents to the FIC remains in their estate (it is an asset, a debt owed by the company). But all growth belongs to the shareholders (children). Over time, the parents can write off the loan using annual gift exemptions, or interest can be charged at commercial rates and paid to the parents as income. Shares held by the FIC in trading companies may qualify for Business Property Relief (BPR) -- reducing IHT on those assets to zero. Tax efficiency: the FIC pays corporation tax at 19% (small profits rate, on profits up to GBP 50,000) or 25% (main rate, above GBP 250,000) -- lower than the 45% additional income tax rate a private investor might pay personally. Dividends received from other UK companies are generally exempt from corporation tax. Capital gains inside the FIC are subject to corporation tax rather than CGT. HMRC scrutiny: HMRC issued a series of consultation documents on FICs and has them under review. They are legal, but HMRC looks carefully at: whether the funding loan is genuine, whether benefit-in-kind rules apply to founder shareholders, and whether the share structure has commercial substance. Arrangements that are purely tax-driven without commercial substance can be challenged. A FIC requires more administration than a trust: annual accounts, corporation tax returns, Companies House filings, and good governance. Legal and tax advice from a specialist is essential before establishing one.

Try the calculator