Inheritance Tax Planning Series – Using FIC’s

Inheritance Tax (‘IHT’) planning is a critical consideration for individuals seeking to preserve wealth for future generations. In the UK, IHT is levied at 40% on estates above the nil-rate band (‘NRB’) (£325,000 per individual as of 2025, with potential additional allowances like the residence nil-rate band). Family Investment Companies (‘FICs’) have emerged as a sophisticated and flexible vehicle for IHT planning, offering tax efficiency, control and wealth protection. This article explores the use of FICs in IHT planning, their benefits, setup considerations, and key strategies.

What is a Family Investment Company?

A FIC is a private company, typically limited by shares, established to hold and manage family wealth. The company is owned and controlled by family members, with shares allocated to reflect ownership and succession goals. FICs are often used to pool family assets, such as investments, property or cash under a single structure, allowing for centralised management and tax-efficient wealth transfer.

Unlike trusts, FICs are not subject to the same IHT charges on creation, anniversaries, or distributions. Instead, they leverage corporate tax rules and share ownership to minimise IHT exposure while maintaining family control.

Benefits of FICs for IHT Planning

  1. IHT-Free Transfers: Transferring assets to an FIC can reduce the value of an individual’s estate for IHT purposes. Gifts of shares to family members (e.g. children) may qualify as Potentially Exempt Transfers (‘PETs’), becoming IHT-free after seven years, provided the donor survives.
  2. Control Retention: Founders can retain control by holding voting shares or acting as directors, even after gifting non-voting shares to younger generations. This allows wealth transfer without relinquishing decision-making power.
  3. Tax Efficiency: FICs are subject to Corporation Tax (currently 25%) rather than income or capital gains tax at individual rates. Dividends or capital distributions can be timed to optimise tax liabilities.
  4. Asset Protection: Assets within an FIC are ring-fenced from personal liabilities, such as divorce or bankruptcy, safeguarding wealth for future generations.
  5. Flexibility: FICs can be tailored with different share classes (e.g., voting, non-voting, or growth shares) to align with family goals and tax planning needs.

Setting Up an FIC: Key Considerations

  1. Structure: The FIC’s articles of association define share classes, voting rights, and dividend policies. For example, founders may hold “A” shares with voting rights, while children receive “B” shares with dividend or capital growth rights.
  2. Initial Funding: Assets can be transferred to the FIC via cash, property, or investments. Cash is often lent to the FIC as a director’s loan, repayable over time, reducing the founder’s estate while maintaining access to funds if needed in the future.
  3. Valuation: When gifting shares, accurate valuation is critical to determine IHT implications. HMRC may scrutinise share transfers to ensure they reflect market value.
  4. Tax Implications: Transferring assets to an FIC may trigger Capital Gains Tax (CGT) if assets have appreciated. Certain reliefs may defer CGT in some cases. Professional advice is essential to navigate tax rules.
  5. Legal and Compliance: FICs require incorporation, ongoing accounting, and compliance with company law. Costs for setup and management should be weighed against tax savings.

IHT Planning Strategies Using FICs

  1. Freezing the Founder’s Estate

By transferring assets to a FIC and gifting growth shares to children, the founder’s estate value is “frozen.” Future growth in the FIC’s assets accrues to the younger generation’s shares, reducing the founder’s IHT liability. For example:

  • A parent transfers £1 million to a FIC, retaining voting shares.
  • Non-voting shares are gifted to children as PETs.
  • If the FIC’s assets grow to £2 million, the additional £1 million benefits the children’s shares, not the parent’s estate.
  1. Dividend Planning

FICs allow flexible dividend distributions. Founders can allocate dividends to family members in lower tax bands (e.g., adult children with unused personal allowances) to minimise overall tax. Dividends can also be retained within the FIC to fund future growth or further capital for investments, avoiding immediate tax.

  1. Loan Repayment Strategy

Founders can lend money to the FIC, which is repaid over time. Loan repayments reduce the founder’s estate for IHT purposes without triggering immediate tax. The FIC can invest the loan to generate returns, benefiting younger shareholders.

  1. Succession Planning

FICs facilitate gradual wealth transfer. Founders can gift small batches of shares annually, utilising the IHT annual exemption (£3,000) or PETs. Different share classes allow tailored benefits for each family member, aligning with their financial needs or involvement in the FIC.

  1. Combining with Trusts

For added flexibility, FICs can be combined with trusts. For instance, shares can be gifted to a discretionary trust, leveraging the trust’s NRB and providing additional IHT benefits. Trusts also offer greater protection for minor beneficiaries or vulnerable family members.

Risks and Challenges

  1. Complexity and Costs: FICs involve setup costs (legal and accounting fees) and ongoing compliance. Small estates may not justify the expense.
  2. Loss of Access: Assets transferred to a FIC are no longer directly accessible to the founder, though loan structures can mitigate this.
  3. Tax Rule Changes: Future changes to tax legislation could affect FIC benefits. Regular reviews with us are recommended.

Conclusion

FIC’s offer a powerful tool for IHT planning, combining tax efficiency, control, and flexibility. By freezing estate values, optimizing dividends, and facilitating gradual wealth transfer, FICs can significantly reduce IHT liabilities. However, their complexity and costs require careful planning with professional advisors. For high-net-worth families, FICs provide a robust framework to preserve wealth across generations, ensuring a lasting legacy.

If you would like to review your wealth and ascertain if a FIC is right for your family, please get in touch with Trusted Tax Advice using the contact form above.

Editor's Pick

Related Posts