How FICs Have Secured Their Place in the Tax Planning Hall of Fame – and Why Demand Is Only Growing

A question I am asked with increasing frequency by clients, colleagues, and fellow practitioners alike is this: what role can a family investment company play in my estate planning, can I create one with assets I already hold, and is it possible to convert an existing company into one? It is a question that reflects just how firmly the family investment company – commonly known by its acronym, the FIC – has established itself as a central pillar of modern wealth structuring in the United Kingdom.

Over the past decade, the FIC has evolved from a relatively niche planning tool into what I would describe, without exaggeration, as the estate planner’s modern weapon of choice. The reasons for this transformation are manifold, but two developments stand out above all others. First, the increasingly punitive taxation of discretionary trusts since the Finance Act 2006, which introduced immediate lifetime charges, ten-yearly anniversary charges, and proportionate exit charges that have made trusts prohibitively expensive for larger wealth transfers. Second, and perhaps more reassuringly, the fact that HMRC itself has effectively endorsed the legitimacy of FICs as a planning vehicle.

HMRC’s Seal of Approval: From Suspicion to ‘Business as Usual’

It is worth pausing on this second point, because it is of considerable significance. In April 2019, HMRC established a dedicated FIC unit to conduct risk reviews into the use of family investment companies. The creation of a specialist team naturally caused some anxiety amongst practitioners and clients alike, and there was understandable concern that HMRC might be preparing to curtail or restrict the use of these structures. However, the outcome was, in my view, the single most important development in the FIC landscape in the past ten years.

In May 2021, HMRC confirmed that the specialist unit had been disbanded. It had found no evidence to suggest any correlation between the establishment of a FIC structure and non-compliant behaviour. HMRC concluded that those using FICs were no more inclined towards tax avoidance than any other category of taxpayer. Crucially, HMRC recognised that the FIC was a legitimate planning strategy, the primary purpose of which was to transfer wealth between generations and to mitigate inheritance tax. HMRC advised that it would henceforth treat FICs as ‘business as usual’ rather than maintaining a separate dedicated team. The practical effect of this is that FICs are now assessed using normal compliance principles and are not specifically targeted for future investigation.

In my forty years of practice, I have rarely seen HMRC give such a clear and unequivocal endorsement of a planning structure. It would be no exaggeration to say that FICs have now well and truly secured their place in what one might call the tax planning hall of fame. That is not to suggest that HMRC will not scrutinise individual FIC arrangements – they most certainly will, and rightly so – but the structure itself is regarded as entirely legitimate and mainstream.

What Precisely Is a Family Investment Company?

For the uninitiated, it is important to understand that the term ‘family investment company’ has no special legal meaning. There is no dedicated statutory regime, no bespoke registration requirement, and no specific legislative provision that creates or governs FICs. A FIC is simply a private company, incorporated under the Companies Act 2006, which is established for the purpose of holding investments for the benefit of a family. What distinguishes it from an ordinary investment company is the manner in which its share capital is structured, its articles of association are drafted, and the overall governance framework is designed to achieve specific estate planning objectives.

The essential architecture of a FIC is elegantly simple. The founder – typically the parent or grandparent who wishes to transfer wealth – subscribes for voting shares that confer control of the company at both shareholder and board level. These voting shares may carry limited or no economic rights, meaning that the founder retains the ability to direct the company’s investment strategy, appoint and remove directors, and determine when and to whom dividends are paid, without the value of those controlling shares being unduly large for inheritance tax purposes. Other family members, usually children and grandchildren, receive non-voting shares which carry the economic rights – entitlements to dividends and to capital on a winding-up or disposal – but no control over the company’s affairs.

The company is then funded, typically through a combination of equity subscription and director’s loans. The company invests in a range of assets – equities, bonds, open-ended investment companies, capital redemption bonds, residential or commercial property – and the returns are taxed at the prevailing rate of corporation tax rather than at the founder’s personal marginal rates of income tax and capital gains tax.

Why FICs Have Eclipsed Trusts for Wealth Transfer

The comparison between FICs and discretionary trusts is one that I am asked to draw with almost every new client enquiry in this area, and it is a comparison that illuminates precisely why demand for FICs has surged so dramatically. Prior to the Finance Act 2006, discretionary trusts were the predominant vehicle for intergenerational wealth transfer. The 2006 reforms changed the landscape fundamentally. Under the current regime, a lifetime transfer into a discretionary trust in excess of the transferor’s available nil rate band – which has been frozen at £325,000 since April 2009 and will remain so until at least April 2030 following the Autumn Budget 2024 announcements – gives rise to an immediate inheritance tax charge at 20 per cent. Trusts are then subject to ten-yearly periodic charges at rates of up to 6 per cent of the trust fund’s value, together with proportionate exit charges when capital leaves the trust.

A FIC suffers none of these disadvantages. The initial creation of a FIC does not, in itself, constitute a transfer of value for inheritance tax purposes, provided the founder receives shares of equivalent value to the cash or assets contributed. There are no ten-yearly charges, no exit charges, and no immediate lifetime IHT charge on formation. When the founder subsequently gifts non-voting shares to family members, those gifts are treated as potentially exempt transfers. If the founder survives for seven years following the gift, the value falls entirely out of the founder’s estate for IHT purposes. This represents a strikingly more favourable regime than that which applies to discretionary trusts, particularly for larger estates.

Furthermore, the Autumn Budget 2024 has made FICs even more attractive in relative terms. The Chancellor’s announcement that business property relief and agricultural property relief will be reformed from 6 April 2026, with 100 per cent relief capped at £1 million of combined qualifying assets and relief falling to 50 per cent thereafter, has prompted many business owners and farming families to reconsider their entire succession planning strategy. For those whose assets do not qualify for BPR or APR – which includes, by definition, most investment portfolios and property holdings – the FIC remains one of the most powerful tools available.

The Tax Advantages: Corporation Tax, Dividends, and the Power of Compounding

The income tax efficiency of a FIC is one of its most immediately attractive features, though it must be understood in context. The company will pay corporation tax at 25 per cent on its investment income and gains. It should be noted that the small profits rate of 19 per cent does not apply to close investment holding companies, which by definition will include most FICs. Nevertheless, 25 per cent compares very favourably with the top personal rates of income tax at 45 per cent, or 48 per cent for Scottish taxpayers.

Particularly noteworthy is the treatment of dividend income. Most dividends received by a UK company from other UK or overseas companies are exempt from corporation tax under Part 9A of the Corporation Tax Act 2009. This means that a FIC which invests primarily in dividend-producing equities may pay little or no corporation tax at all on that income. The compounding effect of this over a period of years can be remarkable, with significantly more capital available for reinvestment than would be the case if the same portfolio were held personally by an additional rate taxpayer paying 39.35 per cent on dividend income above the £500 nil rate band.

Rental income from investment property held within a FIC also benefits from the corporation tax rate, with the additional advantage that mortgage interest remains fully deductible against rental profits within a corporate wrapper – unlike the position for individual landlords following the phased introduction of the section 24 restrictions under the Finance Act 2015, which restrict relief for finance costs to a basic rate tax credit.

It is important to be candid, however, about the double taxation that arises when profits are extracted from the FIC. Profits that have been subjected to corporation tax are then taxed again in the hands of the shareholders when distributed as dividends, at rates of 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate taxpayers, and 39.35 per cent for additional rate taxpayers. This double charge can erode the initial advantage, and it is for precisely this reason that FICs are most effective as long-term wealth accumulation vehicles where income and gains are retained within the company for extended periods rather than extracted in the short term. The founder’s loan, which remains repayable tax-free, provides a mechanism for the founder to draw down capital without incurring this double charge.

Creating a FIC with Existing Assets: The Practical Reality

One of the most frequent questions I receive is whether it is possible to create a FIC using assets that the client already holds, rather than funding it exclusively with fresh cash. The answer is that it is certainly possible, but the tax consequences of transferring existing assets into a corporate wrapper must be carefully considered and can, in some circumstances, render the exercise uneconomic or impractical.

The simplest and most tax-efficient method of funding a FIC is by way of a cash loan from the founder to the company. This creates no immediate tax consequences whatsoever. The cash remains an asset of the founder’s estate for inheritance tax purposes in the form of a debt owed by the company, but all future income and growth on the invested capital accrues to the benefit of the family shareholders. The loan can be repaid to the founder over time, free of tax, providing flexibility and access to capital in retirement.

Where the client wishes to transfer existing investments – such as a share portfolio, unit trusts, or open-ended investment companies – the position is more complex. A transfer of assets to a company is treated as a disposal at market value for capital gains tax purposes under section 17 of the Taxation of Chargeable Gains Act 1992, because the founder and the company are connected persons. If the investments have appreciated significantly since acquisition, the resulting CGT liability may be substantial. In some cases, it may be possible to transfer the investments in specie by changing the registered ownership of a brokerage account to the company, which avoids the need to liquidate the portfolio but does not avoid the crystallisation of a capital gain on the deemed disposal.

Where property is the asset in question, the tax implications multiply. In addition to capital gains tax on the disposal at market value, stamp duty land tax will be payable by the company on the acquisition. For residential property, the 3 per cent surcharge for additional dwellings under Schedule 4ZA of the Finance Act 2003 will apply, and the annual tax on enveloped dwellings regime may also be engaged for residential properties valued in excess of £500,000 held in a corporate envelope, though reliefs may be available depending upon the use to which the property is put. These cumulative charges can be very significant indeed, and I have advised a number of clients for whom the upfront cost of transferring existing property into a FIC has simply been prohibitive.

That said, where assets are not standing at a significant gain, or where the client has available capital losses that can be offset against the deemed disposal, the timing may be propitious. As I often counsel my clients, the tax landscape is not static, and there will be moments when the stars align more favourably than others. The key is to model the position carefully, comparing the upfront tax cost of the transfer against the long-term inheritance tax savings and income tax efficiency that the FIC structure will deliver over the client’s remaining lifetime and beyond.

Converting an Existing Company into a Family Investment Company

This is, in my experience, the area of greatest practical interest and, regrettably, the area where I most frequently encounter structures that have been poorly advised upon. A significant number of clients approach us having established a limited company to hold an investment property portfolio, often on the advice of their general accountant in response to the section 24 mortgage interest restrictions, but without any thought having been given to the inheritance tax exposure that accompanies the company’s shares.

The fundamental point is this: if you hold shares in a company that owns investment assets – whether property, equities, or cash – those shares form part of your estate for inheritance tax purposes, and because the company is an investment company rather than a trading company, business property relief will not be available to reduce or eliminate the IHT charge. Eventually, you must either give the shares away during your lifetime or face the prospect of a 40 per cent IHT charge on their value at death.

The good news is that it is entirely possible to convert an existing company into a FIC, and this is often far more efficient than transferring the company’s shares to a newly created FIC. If you were to take the shares of your existing company and transfer them to a new family investment company, capital gains tax would be payable on the transfer. By contrast, if you restructure the existing company itself, no such disposal arises.

The conversion process is, in practical terms, surprisingly manageable, though it requires careful professional advice. The essential steps are as follows. First, the company’s articles of association must be redrafted to create the bespoke governance framework that characterises a properly structured FIC. This will involve the creation of multiple classes of shares – typically voting shares with limited economic rights for the founders, and non-voting shares with full economic entitlements for other family members. Second, a shareholders’ agreement should be put in place to regulate the relationship between the different classes of shareholder, to restrict the transfer of shares, and to provide mechanisms for the resolution of disputes. Third, careful consideration must be given to the valuation of the various share classes at the point of reorganisation, and to the inheritance tax and capital gains tax consequences of the share restructuring.

It is also possible, and in many cases advisable, to establish subsidiary companies within the FIC structure. Where the existing company holds both trading and investment activities, a demerger or hive-down may be appropriate to separate the two. Where the company holds property, we nearly always recommend a subsidiary structure to ring-fence the property risk. The flexibility of the corporate form is one of the FIC’s great strengths, and a well-advised restructuring can accommodate a wide variety of family circumstances and objectives.

The Valuation Trap: A Word of Caution on Voting Shares and Growth Shares

I wish to sound a note of particular caution on a matter that has attracted considerable attention in recent months and which demonstrates the dangers of poorly structured FIC arrangements. Some advisers have promoted structures involving so-called ‘growth shares’ that are attributed a nil or negligible value on the basis that they carry no current economic entitlement, with the suggestion that these can be gifted to family members without triggering any inheritance tax charge whatsoever.

This is, in my professional view, a dangerous oversimplification. HMRC’s valuation rules under the Inheritance Tax Act 1984 demand market-based assessments, not nominal values. The case of Lynall v Commissioners of Inland Revenue established the principle that shares carrying rights to future capital appreciation do carry a present value, and HMRC has cited this and other international authorities in support of the proposition that voting shares with no economic rights can carry significant value – with an oft-cited starting point of up to 25 per cent of the company’s worth. Where growth shares are incorrectly valued at nil, the consequence is an underpayment of inheritance tax on a chargeable lifetime transfer, potential penalties for careless or inaccurate returns, and the possibility that HMRC will have up to twenty years in which to investigate if no return is submitted at all.

The lesson is clear: a properly structured FIC requires professional valuation of all share classes, and any adviser who suggests otherwise is exposing their client to unacceptable risk. Proper valuations, bespoke articles of association, and a clear understanding of the interaction between company law, inheritance tax law, and capital gains tax law are non-negotiable prerequisites.

Looking Ahead: FICs in 2026 and Beyond

As we enter 2026, the FIC landscape is as favourable as it has ever been, but it is not without its uncertainties. There has been speculation, as yet unconfirmed, that the government may consider introducing a lifetime cap on the amount that can be passed on inheritance tax-free via gifts, which could materially affect the PET-based planning that underpins much FIC estate planning. HMRC has also reviewed inheritance tax more broadly and has proposed lifetime tax charges on all gifts, though these proposals are not yet in law. In the meantime, the prudent adviser will counsel clients to act sooner rather than later, to take advantage of the current regime whilst it remains in place.

What I can say with confidence, having advised on countless wealth structuring arrangements over the course of my career, is that the FIC is not a passing fashion. It is a sophisticated, legitimate, and highly effective vehicle for intergenerational wealth transfer that, when properly structured and professionally advised upon, can deliver very substantial inheritance tax savings, meaningful income tax efficiency, and a degree of control and flexibility that no other currently available planning structure can match. The fact that HMRC has looked at FICs, scrutinised them carefully, and concluded that they are ‘business as usual’ should give every high-net-worth individual and their advisers the confidence to consider this structure as part of a comprehensive estate plan.

Practical Recommendations

For those considering whether a FIC is right for their circumstances, I would offer the following observations from my experience. First, FICs are most effective for estates where the potential IHT exposure is significant – generally, where the value of the investable assets exceeds £1 million, though this is not a rigid threshold. Below that level, the professional costs of establishing and maintaining a FIC may not be justified by the tax savings. Second, FICs work best as long-term planning vehicles where income and gains can be retained and compounded within the corporate wrapper for extended periods. If the client needs immediate access to all the returns, the double taxation on extraction may negate much of the benefit. Third, the structure must be bespoke. There is no ‘one size fits all’ FIC. The articles of association, share classes, funding mechanism, and governance framework must all be tailored to the specific family’s circumstances, objectives, and dynamics. Fourth, and most importantly, obtain proper professional advice from specialists who understand the interaction between company law, inheritance tax, capital gains tax, stamp duty, and corporate tax. The cost of getting it wrong far exceeds the cost of getting it right.

Conclusion

The family investment company has come of age. It has survived HMRC scrutiny, it has outlasted the punitive trust regime, and it has emerged as the preeminent vehicle for wealth preservation and intergenerational transfer in the United Kingdom. Whether you are establishing a new FIC with cash, transferring existing investments, or converting an existing company, the opportunities are real and substantial – but so are the pitfalls for the unwary. In this, as in all areas of tax planning, the difference between success and failure lies in the quality of the advice.

Vincit Veritas.

If you are considering whether a family investment company could form part of your estate planning strategy, or if you hold an existing investment company that may benefit from conversion into a FIC, LEXeFISCAL LLP would be pleased to assist. We specialise in complex wealth structuring, cross-border tax planning, and high-net-worth estate planning, and we welcome enquiries from individuals, families, and their professional advisers.

Dr Clifford Frank LLM(Tax) PhD HDipICA ATT

Senior Partner, LEXeFISCAL LLP

33 Cavendish Square, London

www.lexefiscal.com

Disclaimer: This blog post is for general information purposes only. It does not constitute legal or tax advice and should not be relied upon without seeking professional advice tailored to your specific circumstances. Tax law is complex and constantly evolving. Each person’s situation is unique.

LEXeFISCAL LLP is regulated by the Institute of Chartered Accountants in England and Wales (ICAEW).

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