Family Investment Companies UK: IHT Planning, Income Shifting and Risks
Updated: 16 May 2026 • Reading time: 9 min
Family Investment Companies (FICs) emerged as a popular alternative to family trusts after the 2006 changes to trust taxation. By using corporate structure rather than trust structure, founders can shift wealth to the next generation without triggering the immediate 20% inheritance tax entry charge that applies to large trust transfers. Understanding how FICs work — and their risks — is essential before using one as part of an estate plan.
How a Family Investment Company Works
A FIC is a private limited company incorporated specifically to hold family investments. The typical structure involves:
- Multiple share classes — founders typically hold A shares (with full voting rights) and children/grandchildren hold B shares (with dividend rights and economic growth but limited or no voting control)
- Founder loan or subscription — the founders inject capital into the company, either as a loan (repayable, so it returns to their estate as cash rather than growing assets) or by subscribing for shares at market value
- Gift of growth shares — children subscribe for growth shares at minimal value (the company is new and worth little); future growth in investments accrues to those shares, outside the founders’ estate
- Corporate investment — the company invests in equities, property, bonds, or cash; it pays corporation tax on profits; retained profits grow within the corporate wrapper
IHT Advantages
The primary IHT advantage is the absence of the trust entry charge. When a gift into a discretionary trust exceeds the nil-rate band (£325,000), the excess is subject to a 20% IHT charge immediately. No such charge applies when founders subscribe to a FIC or lend it money.
The growth in value of the children’s shares (as investments grow within the company) accrues outside the founders’ estate from day one. If the founders make outright gifts of shares to children, these are Potentially Exempt Transfers (PETs) — free of IHT if the founders survive seven years.
There are also no ten-year periodic charges or exit charges (which apply to discretionary trusts), making FICs cheaper to maintain from an IHT perspective over the long term.
Income Tax Efficiency
Investment income and gains within the FIC are subject to corporation tax:
- 19% on profits up to £50,000 (small profits rate)
- 25% on profits above £250,000 (main rate, 2026)
- Marginal relief applies between £50,000 and £250,000
Compare this to the 45% additional rate income tax that higher-earning founders would pay on the same investment income personally. Profits can be retained within the company and reinvested, deferring personal tax until dividends are paid out.
When dividends are paid to children or other family members who are basic-rate taxpayers (or who have unused personal allowances), the effective combined tax rate is significantly lower than the founders paying directly. This income shifting is legitimate provided the family members genuinely own the relevant share class.
FIC vs Discretionary Trust: Comparison
| Feature | FIC | Discretionary Trust |
|---|---|---|
| IHT entry charge | None | 20% above NRB |
| 10-year periodic charge | None | Up to 6% of trust value |
| Exit charge | None | Up to 6% of distribution |
| Income tax rate | 19–25% (corporation tax) | 45% (additional rate) |
| Ongoing admin | Company law compliance (annual accounts, confirmation statements) | Trust accounts, tax returns |
| Control | Retained via voting shares | Trustees hold discretion |
| Suitable asset size | Typically £1m+ | Any (but NRB limit matters) |
HMRC Scrutiny and Risks
HMRC announced a review of FICs in 2019 and continues to monitor the area. As of 2026, there is no specific anti-avoidance legislation targeting FICs, but HMRC may challenge arrangements under:
- General Anti-Abuse Rule (GAAR) — if the overall arrangements are deemed abusive tax avoidance
- Settlements legislation (ITTOIA 2005 ss.619–648) — if the founders retain too great a benefit from the income in children’s hands, HMRC may attribute that income back to the founders
- Transfer of assets abroad rules — if the FIC holds offshore assets
A well-structured FIC with genuine share ownership, clear commercial rationale, and independent advice is unlikely to be successfully challenged. However, the risk is real and the area is evolving. Professional advice from a specialist tax adviser is essential before establishing a FIC.
Practical Considerations
- Set-up costs: legal and tax advice, incorporation, share structure design — typically £5,000–£15,000
- Ongoing costs: annual accountant fees, company secretarial, corporation tax returns
- Exit: taking money out of the company requires paying dividend tax; liquidation triggers CGT
- Property in a FIC: Annual Tax on Enveloped Dwellings (ATED) may apply to residential property worth over £500,000 held in a company
- FICs work best as a long-term structure — at least 10–15 years — to maximise the compounding benefit
Frequently Asked Questions
What is a Family Investment Company (FIC)?
A Family Investment Company is a private limited company set up to hold and manage investments — typically property, equities, or cash — for the benefit of a family. The founding generation (parents or grandparents) subscribes for shares or lends money to the company, and additional share classes are created for children and grandchildren. The founders typically retain voting control while gifting economic value (dividend rights, growth shares) to the next generation.
How does a FIC reduce inheritance tax?
When founders subscribe to a FIC or lend it funds, they can gift growth shares (shares with rights to future growth) to children at minimal value — the value at the time of subscription is low. Future growth in the company's investments accrues to the children's shares, outside the founders' estate. The founders may also make loans to the company which can be written off over time. As the loan is repaid it comes back into the estate, but as funds are invested and grow within the company, that growth sits in children's hands.
How does a FIC compare to a discretionary trust for IHT planning?
Key advantages of FICs over trusts: (1) no immediate IHT entry charge (trusts face a 20% charge on transfers above the nil-rate band); (2) no ten-year periodic charge; (3) no exit charges; (4) corporation tax rate (25% for profits above £250,000 in 2026) is lower than the 45% additional-rate income tax in a trust. Key advantages of trusts: simpler structure; more flexible for non-investment assets; better for protection from relationship breakdown; FICs require ongoing company law compliance (accounts, confirmation statements).
What are the income tax benefits of a FIC?
The FIC pays corporation tax on its profits (25% for large profits; 19% small profits rate for profits up to £50,000). Retained profits are not subject to income tax until extracted. When dividends are paid to family members who are basic-rate taxpayers or non-taxpayers (children, lower-earning spouses), the combined tax charge can be lower than the founders paying income tax directly on investment income at 45%.
Is HMRC scrutinising Family Investment Companies?
Yes. HMRC announced a review of FICs in 2019 and has monitored the area closely. As of 2026, FICs remain a legitimate planning structure — HMRC has not introduced specific anti-avoidance legislation targeting them directly. However, individual arrangements may be challenged under general anti-avoidance rules (GAAR) or settlements legislation if the tax advantages appear artificial or if the founders retain too much control and benefit. Professional advice is essential.
Who is a FIC suitable for?
FICs are most suitable for high-net-worth individuals with significant investable assets (typically £1m+) who want to reduce IHT while retaining control, shift investment income to lower-rate taxpayers within the family, and are comfortable with the ongoing administrative burden of running a company. They are less suitable for smaller estates or those who want a simple, low-maintenance structure.
Start with a Will — Build an Estate Plan
A FIC is a sophisticated structure that works alongside — not instead of — a well-drafted will. WillSafe helps you create the foundational document your estate plan needs, while signposting when specialist tax advice is appropriate.
Get started with WillSafe