How a Family Investment Company Can Protect Your Wealth
For successful business owners and other high-net-worth individuals, long-term wealth management isn’t just about growing your assets, it’s about protecting them for future generations.
With increasing awareness of the tax impact when it comes to inheritance tax and succession planning, many families are turning to Family Investment Companies as a flexible, tax-efficient solution to protect wealth and hand it over to the next generation.
In this blog, our taxation experts will explore the purpose of a family investment company and highlight some of the main tax benefits and how people use a family investment company.
What is a family investment company?
A Family Investment Company (FIC) is a private company set up by a family to hold and manage investments, such as stocks, bonds, real estate, or other assets.
They’re especially suitable for clients with significant assets, complex family arrangements, or concerns around tax exposure and succession.
It’s structured to serve as a vehicle for wealth management, with the aim of growing family assets while providing a method to pass wealth across generations in a tax-efficient manner.
What sets an FIC apart is how you can involve the next generation. Shares in the company can be issued to a family trust, allowing children or grandchildren to benefit from the value of the assets without immediately handing over control.
This allows the founder to retain decision-making authority, while also setting a clear structure for how the company’s value is eventually passed on, a key consideration for families with substantial private wealth.
Why use a Family Investment Company?
A Family Investment Company (FIC) can provide a flexible structure for managing family wealth across generations. For many families, the appeal lies in the ability to retain control over how assets are managed and distributed, particularly in scenarios such as marriage, divorce, or the involvement of younger generations.
By centralising investments within a corporate structure, a FIC can also support a more streamlined approach to succession planning and long-term asset protection.
While potential tax efficiencies can be a feature of using a FIC, for example, in relation to corporation tax on retained profits or inheritance tax planning, these advantages should be seen as part of a wider framework of responsible and legitimate wealth planning, not the sole driver.
Lower tax on investment income
One of the biggest tax advantages of a FIC is that it pays Corporation Tax at a rate of 25% on profits made from investments, which is often lower than the rate of tax that high earning individuals and entrepreneurs may pay on the same income.
For example, if you held investments personally and were in either the higher or additional tax rate, you would pay 40% or 45% in income tax on any profits, so using an FIC could lower this as part of your overall tax planning.
A Family investment company supports with inheritance tax planning
As well as setting up a FIC with a family wide share structure, you can gradually gift shares in the FIC to your children as part of your inheritance planning.
These gifts are classed as Potentially Exempt Transfers for Inheritance Tax, which means if you survive seven years after making the gift, the value of those shares will no longer be counted as part of your estate.
Inheritance tax can have significant impact to your estate. For example, if the combined current value of your estate is in the region of £6,000,000 and no action is taken to reduce it, this could result in an estate chargeable to IHT more than £6,350,000 – leading to an IHT liability of around £2,540,000.
With the right structure and advice, a Family Investment Company offers a practical way to start reducing that liability while still retaining control over, and access to, your assets.
More control over personal tax liabilities
As the director of the company, you can choose when to pay dividends and who receives them. This allows you to distribute profits to family members with lower income tax rates, helping to reduce the overall tax paid across the family.
You can also retain profits within the company and pay dividends in future years when it’s more tax efficient. Dividends can be allocated to adult children who haven’t used their full personal allowance, making the most of available tax bands.
Compared to trusts, FICs offer greater flexibility while still giving you control, making them ideal for supporting family goals like education or property purchases in a tax-efficient way.
Flexible funding with director loans
Director loans allow you to lend money to a family investment company and withdraw it later tax-free, offering a flexible, efficient way to access funds without triggering income tax. This is often the preferred route for “funding” a new FIC and brings with it a plethora of tax planning advantages.
It’s important to note that this is a complex area of planning, and professional advice should always be sought before proceeding with this type of structuring.
Long-term planning for the next generation
A family investment company (FIC) is a way to involve your children in managing family wealth while keeping control in your hands. This approach can be tailored to suit your family’s values and structure, clearly defining roles and responsibilities.
As a director, you retain decision-making power, but you can gradually pass on the economic benefits by holding shares in trust for your children.
By placing shares in trust, your children can benefit from the company’s long-term growth, just like owning a property that gains value, without handing over control before they’re ready.
Expert tax support from Edwards Chartered Accountants
Family investment companies can be incredibly effective, but only when tailored to your unique circumstances. Our taxation experts guide you through the process of setting up and running a family investment company, from initial structuring and tax implications to long-term planning.
Contact Edwards Accountants today. We’ll help you build a plan that reflects your goals, values, and family’s future.
