Family investment companies are a useful way to manage wealth. They help people pass their assets to the next generation.

They became more popular after a change in 2006. This change added a lifetime inheritance tax on trust transfers. The tax applies to amounts over £325,000. The family investment company (FIC) structure is much more leniently taxed.

What is a family investment company?

A family investment company is simply a private company, one incorporated and registered with Companies House. Its purpose is to hold the investments of a family. It is usually incorporated with limited liability.

A FIC does not have to be registered in the UK. It can be registered in another country if that works better for the family. However, a UK resident will probably register it in the UK.

What are FICs good for?

FICs are a good tool to use for wealth planning as they can allow for some inheritance tax exemptions. For example, gifts of shares made to family members would be inheritance tax exempt, provided the party gifting the shares survived for at least seven years after the gift.

As private companies, FICs do pay corporation tax at 25%. However, this is a better rate than the top rate of income tax, at 45%, and will pay dividends which are tax free most of the time. Capital gains tax will be chargeable at the corporation tax rate.

There may be additional taxation when extracting money from the company, including on dividends, salaries if anyone is employed by the company, and capital gains tax when the company is liquidated, which can also be considered as income in some cases.

While these taxes may seem significant, when using the company as an investment vehicle over many years, these rates make FICs ideal for wealth planning, particularly regarding family wealth. If money is going to be withdrawn and spent in the short term, rather than the long term, then other vehicles and systems are available.

Learn more about J Sweeney’s estate planning services.