These entities are companies "like no other," the author writes. These structures can be used to help with inheritance tax planning. While not a magic bullet, they deserve scrutiny.

The following article covers a particular structure in the UK that comes with specific tax advantages – at least for now: The Family Investment Company. The author is Dipesh Galaiya (pictured below), who is a private client tax senior manager at Kreston Reeves, a wealth advisory and accountancy firm. The editors are pleased to share these views; the usual editorial disclaimers apply to the views of outside contributors. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Dipesh Galaiya

If you have come into money either by way of an inheritance, selling a property or other assets, or have extracted your tax-free lump sum from a pension fund, you may want to consider investing these funds tax-efficiently to help enhance their growth. 

With restrictions being imposed on inheritance tax (IHT) reliefs such as Business Property Relief and Agricultural Property Relief from 6 April 2026, and the undrawn pension funds being exposed to IHT from 6 April 2027, you may need to look further afield for tax-efficient ways of investing.

A big desire for many parents and even grandparents is to grow their investments and preserve these assets for the long-term benefit of the family, in a tax-efficient manner.

The solution may be a Family Investment Company (FIC). A FIC is a company just like any other. Its shareholders can include various family members and directors who are usually the custodians or those who fund the FIC. Through the appointment as directors of the FIC, you maintain overall control over the assets of the FIC.

FICs provide a very good structure which allows your children to be involved with your investments as, ultimately, they take up the mantle. Although there is a myth that one needs substantial wealth to consider a FIC, many people with around £500,000 ($671,043) are now considering this as an option.

There are different ways of funding a FIC – subscribing for shares in the FIC using cash or selling assets (e.g. property) to a FIC. Ordinarily, a FIC will not have a cash reserve when it is set up and therefore if you sell an asset to a FIC, it will be in exchange for an IOU (a loan which the FIC will owe you). Alternatively, you can lend a cash sum to the FIC, the IOU being repayable to you in the future, tax free.

Subscribing for shares in a FIC (or lending cash sums to it) does not trigger any tax charges. But selling assets (e.g. property) will result in a capital gains tax charge, on the difference between the asset’s current market value and the original acquisition cost, as well as stamp duty land tax.

If you owned an asset that is then sold to the FIC, your ownership of the asset is replaced by a proportion of the FIC, through your shareholding, and an IOU. In time, a proportion of the growth of the company will lie outside your estate for inheritance tax purposes due to you holding less than 100 per cent of the share capital. Furthermore, if you don’t require these funds then you can consider gifting the IOU to your children or grandchildren. This will be a potentially exempt transfer, and the gift will fall outside your estate upon survival for seven years, thereby achieving greater IHT mitigation.

Assets, for example, property generating annual income (e.g. rental profits), may ordinarily attract income tax rates of 40 per cent or 45 per cent, but with the above planning, under a FIC, this income stream will attract corporation tax at 25 per cent.

If, for example, your FIC invests in a basket of FTSE 100 shares then any dividends received by the FIC from the underlying companies will be free of any tax, whereas if an additional rate taxpayer made a similar investment, then the dividends would be subject to income tax at 39.35 per cent. 

As the provider of capital to the FIC, you can have a shareholding in the company which enables you to have access to income from the FIC via dividends. The FIC can issue shares of different classes (otherwise known as alphabet shares) to different shareholders which gives further flexibility on which share classes have a right to future dividends. This flexibility is especially important where you have minor children/grandchildren. “Minor” in this article refers to someone who is below the age of 18 years.

Where the FIC is set up by parents and shares are issued to minor children, any dividends paid to minor children (above £100) will be taxed on the parents. Therefore, the alphabet shares enable dividends to be paid to adult children who can use their personal allowances and thereby pay no or very low-income tax – very effective for funding higher education.

Where the FIC is set up by grandparents and shares are issued to minor grandchildren then any dividends paid to minor grandchildren will not be taxed on their parents, but rather the grandchildren can use their personal allowances and thereby pay no or very little income tax. This is particularly useful for school fees planning. The IOU also enables you to extract monies (up to the value of the IOU) from the FIC tax-free.

Depending on your circumstances, you can also add a trust structure to hold the shares in the FIC for any children/grandchildren. This helps with protecting the FIC’s assets for the long term against events such as marital breakdown, insolvency or bankruptcy, etc. As a trust can have a life of 125 years, this can enable the assets to benefit multiple generations of the same family.

Through careful planning, you can grow your investments and involve your family while protecting these assets tax-efficiently for the long-term benefit of the family.