The changes to inheritance tax (IHT) announced in the budget in October 2024 have highlighted the need for careful succession planning.

One solution, which is often overlooked, yet can be an effective estate planning solution when set up properly, is a Family Investment Company (FIC), which is used to hold and make investments including shares and property, as a family trust may do.

In its simplest form, an FIC is a limited company where the shares are gifted to family members to reduce the giftor’s estate value.

The shares in the FIC are held by various family members who will then have rights to dividends and/or a return on capital. These rights can vary for each family member and can be used to pass income and capital to family members in a tax efficient way.

Setting up an FIC

Typically, an FIC is arranged by more senior members of the family, such as parents, who gift assets to the company, with shares then issued to family members.

An FIC can be set up with each shareholder having different rights using different classes of shares – usually known as alphabet shares.

How will the FIC be taxed?

Unlike a trust, there is no ongoing charge to IHT in the company.

Any profits made in the FIC will be subject to corporation tax at a rate of 25%, which could be significantly lower than the highest rate of income tax personally charged on members of the family. However, an FIC is exempt from tax on any dividends income received from investments in shares (eg plc shares). An FIC can generally also take a tax deduction for expenses incurred when managing the investments.

Advantages

Growth shares are often used in FICs; the rights attached to these shares allow future growth in the value of the shares to be attributed to the growth shares (typically held by the younger generation) and effectively freezes at current value the value held by the older generation.

Having the ability to set out different classes of shares means that bespoke gifting mechanisms may be created to meet a family’s specific requirements.

When might an FIC be unsuitable?

There are some instances where the use of an FIC may not be tax efficient. Investments that could benefit from reliefs which are available only to individuals – for example Business Asset Disposal Relief for capital gains tax (CGT) or Business Property Relief (for inheritance tax) – would be better held personally.

The transfer of any existing assets into the FIC could give rise to substantial CGT liabilities in the hands of the transferors, should these assets be standing at a gain. Transfer to a connected party (an FIC) would be deemed to have taken place at open market value. If these assets consist of land and buildings, a charge to stamp duty land tax (SDLT) could also arise, as the transfer into a connected company is again deemed to have taken place at open market value.

Another tax disadvantage of the use of a company is the “double tax trap”. In addition to the corporation tax at 25%, income arising in the company, if then used to pay a dividend, will be taxed in the hands of the shareholder recipient.

As with any limited company the FIC will be registered at Companies House and must file accounts which become publicly available documents (although it is possible to use an unlimited company which does not require accounts filing at Companies House).

An FIC is suitable for long term planning for those with complex tax arrangements; appropriate advice should be taken when considering it as a succession planning solution.

If you wish to discuss the use of a Family Investment Company, please get in touch with our friendly team on (01482) 325242 or contact fiona.phillips@andrewjackson.co.uk