Why family investment companies are back in the spotlight

Family investment companies (FICs) have been around for many years, but they are attracting renewed attention as families review their succession plans in light of inheritance tax changes.

For some families, they can provide a useful way to pass wealth to the next generation whilst retaining control over how assets are managed. However, like any planning arrangement, they are not suitable for everyone and need careful consideration before being implemented.

What is a family investment company?

A family investment company is a private limited company used to hold investments, such as cash, shares, property or other assets.

What makes FICs different from holding assets personally is the flexibility they can offer around ownership and control. It is possible to separate voting rights from economic ownership, allowing parents or founders to continue making decisions about the company’s affairs whilst passing future value to children or other family members.

This is often achieved through different classes of shares, which can carry different rights to voting, income, and capital.

Why are more families considering FICs?

For many years, business property relief (BPR) and agricultural property relief (APR) have played an important role in inheritance tax planning for business owners and farming families.

As the inheritance tax landscape evolves, more families are reviewing how they hold and transfer wealth. For some, this has prompted renewed interest in family investment companies.

A FIC can offer a combination of control, flexibility and succession planning opportunities that are difficult to achieve through outright gifts or personal ownership alone. In particular, it can allow families to begin transferring future wealth to younger generations without giving up day-to-day control over assets and investment decisions.

That does not mean a FIC is automatically the right answer. However, it is increasingly becoming part of conversations around long-term wealth planning.

Retaining control whilst planning ahead

One of the main attractions of a family investment company is that control does not necessarily have to follow ownership.

Parents may be comfortable passing future value to children but less comfortable giving up decision-making responsibilities immediately.

By structuring share rights carefully, founders can often maintain control over investment decisions, dividend policy and the company’s wider strategy, whilst allowing future growth in value to accrue elsewhere.

For families concerned about handing over assets too soon, this can be particularly appealing.

Passing future growth down the generations

One of the most common reasons for establishing a family investment company is to move future growth outside an individual’s estate for inheritance tax purposes.

A typical structure allows founders to retain the current value of their assets while arranging for future growth to accrue to shares owned by children or trusts. If the value of those assets increases over time, the growth may sit outside the founders’ estates, potentially reducing a future inheritance tax liability.

The principle sounds straightforward, but the tax implications are not always simple. Valuation, share rights and the wider family circumstances all need careful consideration before any structure is implemented.

Managing income more flexibly

Family investment companies can also provide greater flexibility over how investment income is distributed.

Different classes of shares and the use of trusts can allow dividends to be paid to different family members, helping families adapt to changing circumstances over time. This flexibility can be particularly useful where family members have different income levels or different objectives.

However, this is also an area that requires care. Anti-avoidance legislation can apply where income is diverted between family members, so dividend arrangements should always be considered within the wider tax framework.

The corporate tax environment

Unlike individuals, a family investment company pays corporation tax on its profits.

Depending on the assets held and the family’s objectives, this can create opportunities to reinvest profits within the company rather than extracting them personally.

The position varies significantly depending on the type of investment held within the company. Careful consideration must be given to the type of investment within the company as the taxation of these is often overlooked or misunderstood. Without proper planning, this can lead to unexpected tax consequences and reduce the effectiveness of the structure.

Creating a framework for family wealth

Beyond tax, many families find value in the governance that a family investment company can provide.

A company structure creates clear ownership records, formal decision-making processes and defined responsibilities. For families thinking about wealth across multiple generations, this can provide a useful framework for managing assets and expectations.

In many cases, the governance benefits can be just as important as the tax considerations.

What are the potential pitfalls?

Whilst FICs have become increasingly mainstream, they remain complex structures that require ongoing attention.

The tax rules surrounding share rights, company valuations and income distributions can be difficult to navigate. Introducing new shareholders, creating additional share classes or changing dividend arrangements can all have unintended consequences if not planned properly.

There is also a tendency for some families to focus solely on inheritance tax. In reality, a successful family investment company needs to work commercially and practically as well as tax efficiently. Governance, family objectives and succession planning are often just as important as the tax outcome.

Why advice matters

No two families have the same objectives.

Some are primarily concerned about inheritance tax. Others are focused on retaining control, protecting family wealth, encouraging succession or creating a framework for future generations.

A successful family investment company should reflect those objectives rather than follow a standard template.

Careful planning is needed not only when establishing the structure, but also as circumstances change over time. Shareholder arrangements, company records, dividend decisions and ongoing compliance all need to be managed correctly.

Is a family investment company right for you?

Family investment companies are often most relevant where there is significant family wealth, a long-term investment horizon and a desire to transfer value to the next generation whilst retaining control.

Whilst there is no fixed minimum level of wealth, family investment companies are most commonly considered by families with investment assets of £2 million or more, where the potential benefits can justify the additional costs and administration.

That said, they are not the only option available and they are not appropriate in every situation. In some cases, simpler arrangements may achieve the same objectives with less complexity and ongoing administration.

The right solution will depend on your family’s circumstances, your existing asset structures and what you are ultimately trying to achieve. A family investment company should be viewed as a planning tool rather than a planning objective in its own right.

If you are reviewing your inheritance tax position or considering how best to pass wealth to the next generation, our Wealth and Succession team can help you understand whether a family investment company could have a role to play within your wider planning.