Setting up Family Investment Company is a strategic way to manage, grow, and protect family wealth while improving tax efficiency. This guide explains the key considerations involved in setting up a Family Investment Company in the UK, covering structure, funding, governance, and tax planning. A well-designed Family Investment Company can play a central role in long-term family wealth planning and succession.
Key Takeaways
- Family Investment Companies provide a flexible and effective alternative to traditional trusts for holding and managing family wealth, particularly for inheritance tax planning.
- Setting up a Family Investment Company requires careful planning around company structure, share classes, governance, and funding to balance control and value transfer between generations.
- While Family Investment Companies offer clear tax and control advantages, they also involve complexity, ongoing compliance obligations, and potential family governance challenges that must be managed carefully.
What is a Family Investment Company?
A Family Investment Company, commonly referred to as an FIC, is a private limited company established to hold and manage family investments and assets. Unlike trusts, which can be restrictive and administratively heavy, a Family Investment Company offers flexibility, transparency, and control over investment decisions.
Family Investment Companies are often used to support intergenerational wealth planning. Assets transferred into the company can be removed from an individual’s personal estate, reducing potential inheritance tax exposure over time. At the same time, founders can retain control through carefully structured share classes and voting rights.
Key advantages of a Family Investment Company include enhanced control over assets, flexible income distribution, and long-term tax planning opportunities when compared with personal ownership or trust structures.
Steps to Incorporate a Family Investment Company
Setting up a Family Investment Company involves several important steps that determine how effectively it will operate. These include forming the company, drafting governing documents, appointing directors, and transferring assets into the structure.
Professional advice is essential to ensure the Family Investment Company is structured correctly from the outset and aligned with the family’s objectives, risk profile, and long-term plans.
Registering the Company
The first step in setting up a Family Investment Company is registering a private limited company with Companies House. This includes selecting a company name, appointing directors, and establishing a registered office address.
This formalises the legal existence of the Family Investment Company and allows it to hold assets, enter into contracts, and operate as a separate legal entity.
Drafting the Shareholders’ Agreement
A clearly drafted shareholders’ agreement is essential for the smooth operation of a Family Investment Company. It defines ownership rights, dividend policies, decision-making powers, and procedures for resolving disputes.
By tailoring the shareholders’ agreement and articles of association to the family’s circumstances, potential conflicts can be reduced and long-term governance strengthened.
Structuring Shareholding
Share structure is one of the most important elements of a Family Investment Company. Different classes of shares can be issued to separate control from economic value.
Founders often retain voting shares to control investment decisions, while growth or dividend shares are issued to children or other family members. This allows wealth to pass to the next generation while founders maintain oversight and strategic control.
Funding Your Family Investment Company
A Family Investment Company must be adequately funded to meet its investment objectives. Funding can be introduced through capital contributions or loans from family members, each with different tax and practical implications.
Choosing the right funding method is critical to achieving flexibility and long-term efficiency.
Capital Contributions
Capital contributions to a Family Investment Company can be made using cash or non-cash assets such as property or investment portfolios. Shares are often issued at nominal value to establish ownership without triggering unnecessary tax charges.
This approach creates a strong financial foundation for the Family Investment Company and supports future investment activity.
Loans to the Company
Loans from family members are a common way to fund a Family Investment Company. Loan funding provides flexibility, as capital can be repaid to the lender without triggering additional tax charges.
This method is particularly useful where founders wish to retain access to funds while allowing investment growth to occur within the company.
Tax Considerations for Family Investment Companies
Tax planning is a key reason families choose to set up a Family Investment Company. When structured correctly, an FIC can support inheritance tax mitigation, income tax efficiency, and long-term capital growth.
Retaining profits within the company allows value to accumulate at corporate tax rates rather than higher personal rates, supporting intergenerational wealth planning.
Corporation Tax
Family Investment Companies are subject to UK corporation tax. Profits up to £50,000 are taxed at 19 percent, while profits above £250,000 are taxed at 25 percent. Marginal relief applies between these thresholds.
This can be significantly more efficient than holding investments personally, particularly where income is reinvested rather than withdrawn.
Capital Gains Tax
Transferring assets into a Family Investment Company can trigger capital gains tax and stamp duty charges, depending on the nature of the assets involved. Advance planning is essential to manage these liabilities effectively.
When the Family Investment Company disposes of assets, gains are taxed at corporation tax rates, which may be lower than personal capital gains tax rates in some circumstances.
Inheritance Tax Planning
Inheritance tax planning is a central objective for many Family Investment Companies. By gifting shares over time and surviving the seven-year period, founders can reduce the taxable value of their estate.
Family Investment Companies offer a flexible alternative to trusts for inheritance tax planning, allowing wealth to be transferred while maintaining control and governance.
Managing a Family Investment Company
Ongoing management is essential to ensure a Family Investment Company remains effective and compliant. This includes governance, investment oversight, and regulatory reporting.
A well-run Family Investment Company can also help educate younger generations about investment decisions and financial responsibility.
Governance and Control
Strong governance underpins a successful Family Investment Company. Clear roles for directors and shareholders, supported by well-drafted constitutional documents, reduce uncertainty and disputes.
Control can be retained through voting shares, ensuring founders remain responsible for strategic decisions while sharing economic benefits with family members.
Investment Strategy
An effective investment strategy aligns the Family Investment Company’s activities with the family’s objectives and risk tolerance. Investment decisions should support long-term growth rather than short-term gains.
Regular reviews ensure the strategy remains appropriate as family circumstances evolve.
Compliance and Reporting
Family Investment Companies must meet ongoing compliance requirements, including filing annual accounts, corporation tax returns, and confirmation statements.
Professional support is often required to manage these obligations accurately and efficiently, particularly where complex investments are involved.
Benefits of Setting Up a Family Investment Company
Family Investment Companies offer tax efficiency, centralised asset management, and flexible income distribution. They support long-term wealth preservation and structured succession planning.
By separating ownership from control, FICs allow families to pass value to future generations while protecting decision-making authority.
Potential Drawbacks and Challenges
Despite their advantages, Family Investment Companies are not suitable for everyone. They involve administrative complexity, professional costs, and the need for effective family governance.
Smaller portfolios may not justify the costs involved, and careful assessment is required before proceeding.
Double Taxation
Double taxation can occur when profits are taxed at the company level and dividends are taxed again when distributed to shareholders.
Careful planning around dividend timing and recipient tax positions can help mitigate this issue.
Costs and Complexity
Setting up and running a Family Investment Company involves initial legal and advisory costs, followed by ongoing accounting and compliance expenses.
These costs should be weighed against potential tax savings and long-term benefits.
Family Conflicts
Differences in investment views or expectations can create tension within a Family Investment Company. Clear governance arrangements and open communication are essential to minimise disputes.
Succession planning can also present challenges as control transitions to the next generation.
Examples of Family Investment Companies in Action
Practical examples show how Family Investment Companies can centralise wealth management, support multigenerational planning, and deliver tax efficiency when structured correctly.
They also highlight the importance of professional advice to avoid unintended tax consequences or governance issues.
Summary
A Family Investment Company can be a powerful tool for managing and protecting family wealth. When structured correctly, it offers tax efficiency, flexibility, and effective succession planning.
However, careful planning and ongoing professional support are essential to ensure the structure remains compliant, efficient, and aligned with family objectives.
Frequently Asked Questions
How do you set up a Family Investment Company?
Setting up a Family Investment Company involves forming a private limited company, drafting governing documents, appointing directors, and transferring assets. Professional advice is essential to ensure tax and legal compliance.
Is a Family Investment Company a good idea?
A Family Investment Company can be highly effective for wealth planning and inheritance tax mitigation, but it is not suitable for every family. Costs, complexity, and long-term objectives must be carefully considered.
What is a Family Investment Company?
A Family Investment Company is a private limited company used to hold and manage family investments and assets in a structured and tax-efficient way.
How do you fund a Family Investment Company?
Funding is typically provided through capital contributions or loans from family members, depending on cash flow and tax considerations.
What are the tax advantages of a Family Investment Company?
Tax advantages include corporation tax rates on retained profits, flexible income distribution, and long-term inheritance tax planning opportunities.