Establishing a FIC is a strategic move for long-term family wealth management and transfer. However, with greater use comes more scrutiny from the tax authority. The author considers the case for these entities, and the pros and cons.

Piers Larbey (pictured below), partner in the corporate and commercial team at Hunters Law, considers the case for what are called Family Investment Companies (FICs). Their relevance has risen considerably, arguably, given the recent tax hikes in the UK, and following the 26 November Autumn Budget. 

As with all articles about the pros and cons of certain structures where tax is involved, this article is meant to stimulate conversation. The editors are pleased to share these insights; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Piers Larbey

The popularity of Family Investment Companies (FICs) continues to rise. As a tax-efficient vehicle for wealth structuring, succession planning, and UK inheritance tax (IHT) mitigation, their attraction has been boosted by changes to trusts tax legislation and, more recently, to Business Property Relief (BPR). However, the increased use of FICs has also led to greater scrutiny from HM Revenue & Customs (HMRC) – especially for high net worth individuals and families seeking greater control and flexibility over their assets who use FICs as part of their estate or tax planning.  

So, how do FICs work, and what is the best way to ensure that they remain both effective and compliant with HMRC regulations?

In essence, a FIC is a UK-based private limited company that is used to hold and manage wealth – investments, such as shares, property, or cash – for the long-term benefit of a family. Rather than trusts, the traditional route for passing on wealth, FICs offer a compelling alternative that can be tailored to meet specific family and financial objectives.

Typically, family members become FIC shareholders with different generations holding different classes of share, under a legal agreement which provides clear delineation of ownership, voting rights, and access to income or capital. This structure allows parents, or older generations, to retain control via voting shares, while younger family members hold non-voting shares, thereby enabling the transfer of wealth without full control. Every shareholder should be informed of their roles and responsibilities.

Compared with trusts or direct gifting, FICs offer distinct advantages. Tax efficiency is a primary benefit: most FICs are subject to corporation tax at 25 per cent on income and gains, which is notably lower than higher rates of personal income tax. Profits can be retained and reinvested, allowing for compound growth over time. 

Other key benefits include asset protection and effective succession planning. The FIC’s corporate structure has defined legal safeguards which provide asset protection for family wealth, while older generations can control company decisions without direct ownership of all the assets. 

To facilitate this, FICs are often established with “alphabet shares” which allow different generations of the family to hold different classes of share. They provide clearer delineation of ownership: voting control can be retained by ‘senior’ share classes (appropriate family members) while enabling capital growth to be directed to the holders of “junior” shares. 

In terms of wealth transfer, alphabet shares can also assist in succession planning: shareholdings can be passed down in a tax-efficient, phased manner, potentially without incurring IHT charges.

A key advantage of FICs is the ability to retain control. Unlike trusts, where trustees hold legal title and make decisions on behalf of beneficiaries, a FIC allows senior family members to be actively involved in managing the company and its investments, overseeing strategic decisions and maintaining influence over how wealth is deployed. Dividend payments are carefully managed to ensure that they are made in the most tax-efficient manner possible. 

In terms of governance, the FIC structure provides transparency and flexibility: shareholder agreements can set out rules on decision-making, share transfers, and dispute resolution between family members. In addition, it allows easier integration with other entities, such as family offices or investment vehicles. Critically, it can also be adapted to accommodate future changes in tax legislation. 

Over recent years, the growing use of FICs has inevitably attracted the attention of HMRC, leading to greater scrutiny. In April 2019, HMRC established a specialist unit to examine their role in estate and tax planning, and whether they were being used for tax avoidance. Although no systemic abuse was discovered and the unit was disbanded in 2021, HMRC continues to monitor FICs under standard compliance procedures. In practice, FICs remain legal, but they must be used correctly. Inadequate structuring or aggressive tax planning can lead to unwanted attention.

HMRC compliance is therefore a paramount concern for those using or setting up a FIC. There is much to consider in relation to taxation, in particular: IHT, BPR, double taxation, and capital gains tax (CGT). 

In terms of IHT exposure, FICs are considered to be investment companies rather than trading companies. They do not therefore benefit from BPR, which means that they are fully exposed to IHT at 40 per cent, unless there is effective planning in place. There is also a double taxation risk: FIC profits are initially taxed via corporation tax, and again when distributed as dividends to shareholders, which may be taxed as income. Transferring shares to family members may also trigger CGT: this requires proper valuation – especially for minority holdings.

Other key areas of compliance include reporting obligations and governance. FICs must comply with Companies House filing obligations, maintain accounting standards, and follow corporate governance rules. Failure to deal with administration properly can undermine their legal protections.

In relation to best compliance practice and ensuring that a FIC continues to meet its objectives and avoids HMRC scrutiny, prudence is key. In practice, this means documenting everything clearly: board minutes, loans, share allocations, and dividend decisions. The FIC structure should also be reviewed regularly to accommodate family dynamics and tax rule changes. Artificial tax schemes should be avoided: HMRC is particularly sensitive to any scheme that appears to shift value without real substance.

Establishing a FIC is a strategic move for long-term family wealth management and transfer. This requires careful legal and tax planning to ensure that the structure is appropriate and compliant. Where any doubts or concerns arise, it is prudent to work with appropriate experts: legal and tax advisors who can carefully structure a FIC, ensure that all HMRC regulations and compliance obligations are fulfilled, and regularly review the impact of any tax or regulatory changes. Similarly, it is essential to ensure that all governance documents are suitably robust and reflect the family’s intentions clearly in order to avoid any costly and unwanted disputes.