Family Investment Companies (FICs) have moved from a niche planning idea into one of the most widely discussed structures in UK wealth planning. Part of the reason is the changing tax treatment of trusts, where lifetime transfers above the nil-rate band can trigger an immediate Inheritance Tax charge, and part of it is a wider appetite among families to keep control of capital while gradually passing value to the next generation.
When families decide that a FIC is the right vehicle, one practical question follows almost immediately: how do you get money into it? A common and flexible answer is the Director’s Loan Account (DLA). Rather than gifting assets away or subscribing for large amounts of share capital, the founders lend money to the company and the company holds and invests it. The loan can sit on the balance sheet for years, be repaid in stages, or be passed down over time as part of a wider plan.
This article explains how funding a Family Investment Company through a Director’s Loan Account works, the mechanics behind it, the advantages it can offer, and the risks to weigh. It is written for high-net-worth families, family office decision-makers, wealth advisers, accountants and business owners who want a clear picture before they sit down with their own professional team.
What is a Family Investment Company (FIC)?
A Family Investment Company is, at its simplest, a private company incorporated under the Companies Act 2006 and used to hold and grow investments for the benefit of a family. It is “family” in name because the shares are usually held by family members, or by trusts set up for their benefit, rather than by outside investors.
A typical FIC holds assets such as cash, listed shares, or property, and earns income through dividends, interest and rent. Most are UK-incorporated and UK-resident limited companies, although some families choose unlimited companies for greater privacy, since these do not generally have to file full statutory accounts at Companies House. That privacy comes at a price: the shareholders of an unlimited company remain liable for its debts.
A FIC is usually formed with a small, often nominal, amount of share capital divided into different classes. The founders, frequently the parents, commonly hold the voting shares so that they keep control of how the company is run and how dividends are paid. Other classes, such as non-voting or growth shares, can be held by children or family trusts.
Families turn to FICs to preserve wealth across generations, plan an orderly succession, retain control of capital while value passes to younger members, protect assets within a defined structure, and build a framework of family governance. A FIC is not a tax shelter or an avoidance scheme. HM Revenue & Customs set up a dedicated unit in 2019 to examine how FICs were being used, and after roughly two years of review closed it in 2021, reporting no evidence linking FICs to non-compliant behaviour. FICs are now treated as mainstream private client planning and monitored under standard compliance procedures.
What is a Director’s Loan Account (DLA)?
A Director’s Loan Account is simply the internal record of money that moves between a director and the company, outside of salary, dividends and reimbursed expenses. It tracks who owes what.
The direction of the loan is the point that matters most, and it is where confusion often creeps in. There are two very different situations:
- Lending money to the company. When a director puts their own money into the company, the company owes the director. This creates a credit balance on the Director’s Loan Account, and the director becomes a creditor of the company. This is the situation that applies when founders fund a FIC.
- Borrowing money from the company. When a director takes money out of the company that is not salary or a dividend, the director owes the company. This creates an overdrawn (debit) balance, and it carries its own tax consequences, which we cover later.
In accounting terms, the treatment is straightforward. A loan into the company appears on the balance sheet as cash on one side and a liability to the director on the other. The profit and loss account is not affected, because lending money in is not income for the company and repaying it later is not an expense. Repayment is simply a return of the director’s own capital.
How Funding a Family Investment Company via Director’s Loan Accounts works
The process is usually clean and quick. A simplified step-by-step sequence looks like this:
- Incorporate the FIC. The company is set up with a modest amount of share capital, often split into the desired share classes, with the founders holding the voting shares.
- Document the loan. The founders and the company put a written loan agreement in place, setting out the amount, whether interest is charged, and the repayment terms. Proper documentation is important and is dealt with in the risks section below.
- Transfer the funds. The founders lend the money to the company. The Director’s Loan Account is credited with the amount lent.
- Invest. The company uses the funds to acquire investments in line with its objectives and any investment advice taken.
- Manage repayment over time. The loan can be left in place, repaid in stages, or dealt with as part of the family’s longer-term plan.
An illustrative example
Consider the Hartley family. The parents incorporate Hartley Investments Limited with £100 of share capital, structured into voting shares that they hold and a separate class that can later benefit the next generation. They then lend £1,000,000 to the company on an interest-free basis, supported by a written loan agreement.
On day one, the company’s balance sheet shows £1,000,000 of cash, £100 of share capital, and £1,000,000 owed back to the parents as a creditor. The company invests the £1,000,000 in a diversified portfolio. Suppose that over several years the portfolio grows to £1,500,000.
A few things follow. The dividends the company receives from its UK shareholdings are generally exempt from corporation tax, one of the structural features that makes a company attractive for holding investments. Other income, such as interest and rent, and any capital gains the company realises, are taxed within the company at the corporation tax rate, and the growth accrues inside the company.
Just as important, the parents can ask for some or all of their £1,000,000 loan to be repaid at any time, subject to the company having the liquidity to do so, and those capital repayments are received free of income tax because they represent a return of their own money rather than a distribution of profit.
Repayment flexibility
This flexibility is one of the main attractions of the DLA route. Because the loan is the founders’ own capital, it can be drawn back as circumstances change, whether to fund retirement, meet an unexpected cost, or rebalance the family’s position. It need not follow a fixed schedule and can be repaid out of capital or net profits.
Key advantages
Capital introduction without gifting. Lending money to the company is not the same as giving it away. The founders retain a claim against the company for the amount lent, which keeps their options open in a way an outright gift does not.
Retaining control. Because the founders typically also hold the voting shares, they keep control of investment decisions and dividend policy while value is still directed towards the next generation through the share structure.
Potential inheritance planning benefits. The DLA route can form part of a broader Inheritance Tax plan. Future growth can be directed to shares held by children or trusts, so that it accrues outside the founders’ estates, while the loan itself represents a fixed, or “frozen,” value. Over time the founders may also gift or formally waive portions of the loan, with each step treated as a transfer of value for Inheritance Tax purposes. The important caveat appears under risks below: lending money in does not, by itself, remove value from the estate.
Flexibility of repayment. The founders can call for repayment of their capital free of income tax, a level of access many alternative structures do not match.
Family governance opportunities. Running money through a company creates a natural framework for governance. A board, a shareholders’ agreement, defined share classes and a documented dividend policy give families a structured way to make decisions and to involve the next generation gradually.
Administrative simplicity compared with alternatives. Lending money to a company is generally simpler to put in place than settling assets on trust or carrying out a series of share transactions, and unwinding it is usually as straightforward as repaying the loan.
Potential risks and considerations
A DLA-funded FIC is a serious long-term structure, and it brings obligations as well as benefits. The following points deserve careful attention with professional input.
Tax considerations. A FIC is usually treated as a close investment-holding company, so it pays corporation tax at the 25% main rate on its taxable profits regardless of profit level, rather than benefiting from the small profits rate. If the founders charge interest on their loan, that interest is taxable income in their hands, and the company is generally required to deduct income tax at 20% at source and account for it to HMRC. Many families therefore use interest-free loans for simplicity.
The Inheritance Tax reality of the loan. This is the single most important point to grasp. A loan to the FIC is an asset in the lender’s estate, valued at the amount outstanding. Putting £1,000,000 into the company converts £1,000,000 of cash into a £1,000,000 loan receivable, so it does not reduce the estate on its own. The Inheritance Tax planning comes from what happens around the loan over time, such as gifting growth shares and progressively passing on the loan, and shares in an investment company do not qualify for Business Property Relief. Realistic expectations and tailored advice are essential here.
Documentation requirements. A loan should be supported by a written agreement and reflected accurately in the company’s accounting records and statutory accounts. Clear records of the amount, the terms and any repayments help demonstrate the arrangement is genuine.
Commercial substance. HMRC expects arrangements to have a real commercial purpose behind them. A well-run FIC that genuinely holds and manages investments, keeps proper records and follows its own governance is in a stronger position than one that exists only on paper.
HMRC scrutiny. While FICs are mainstream and were found by HMRC’s own review to have no link to non-compliance, they sit within the normal compliance framework. Areas that can attract attention include income directed to minor children without genuine entitlement, loans that are not properly documented, and complex share structures lacking a clear rationale.
Corporate governance. A FIC is a company, with all that implies. Directors have statutory duties, accounts must be prepared, corporation tax returns filed, and Companies House obligations met, for the life of the company.
Liquidity and repayment planning. Repaying a director’s loan depends on the company having cash available. If most of the company’s value is tied up in illiquid assets such as property, the founders’ ability to draw their capital back quickly may be limited. Liquidity should be planned for, not assumed.
A further point families sometimes overlook is the position of the next generation. Where parents pass shares down successfully, those shares may eventually sit at a significant gain in the children’s hands, creating its own capital gains and Inheritance Tax considerations later. A FIC works best when the whole family’s position is modelled over the long term, not just the founders’ starting point.
Director’s loan vs alternative funding routes
There is no single “best” way to fund a FIC. The right choice depends on the family’s objectives around control, access to capital and succession. The table below sets out how the Director’s Loan Account route compares with the main alternatives.
| Funding route | How value enters | Returning capital | Control retained | Key tax and legal notes |
| Director’s loan | A loan to the company, creating a creditor balance | Repayable in full, free of income tax, subject to liquidity | Yes, the lender keeps a claim and usually holds voting shares | The loan sits in the estate at face value; any interest charged is taxable to the lender; drawing out more than the balance can trigger a separate charge (see below) |
| Equity subscription | Cash paid for newly issued shares | Harder to reverse; usually needs a share buyback or capital reduction | Yes, depending on the share class subscribed | Value sits in the shares rather than as a repayable loan; returning capital is more formal and can carry tax consequences |
| Share gifting | Existing shares given to family members or a trust | Not applicable, since value is given away | Reduced, unless growth or non-voting share classes are used to preserve control | Generally a potentially exempt transfer; Capital Gains Tax may arise if the shares stand at a gain; no Business Property Relief for investment companies |
| External (bank) lending | A third-party loan made to the company | Repaid according to the loan terms, with interest | Yes | Brings an interest cost and possible covenants; interest may be deductible where the borrowing is for the company’s business purposes |
| Trust structure | Assets settled on trust | According to the trust terms | Trustees control the assets, with settlor influence varying by structure | A lifetime Inheritance Tax charge of 20% can apply on value above the £325,000 nil-rate band, plus ten-year and exit charges; offers strong asset protection |
Many families do not pick one route in isolation. A FIC is often funded mainly by a director’s loan, with carefully designed share classes layered on top and, in some cases, a trust holding shares for younger or more distant family members. The combination is what makes the structure flexible.
Common planning scenarios
Parents funding long-term family investments. A couple with surplus capital want to invest for the long term and begin passing value to their children without losing control or giving up access to their money. They incorporate a FIC, lend the capital in through a Director’s Loan Account, keep the voting shares, and allocate growth shares to their children. Future growth accrues to the next generation while the parents retain their loan as a repayable, fixed-value asset.
Multi-generational wealth planning. A family looking several generations ahead uses a FIC as the central vehicle for the family’s investment wealth, with a shareholders’ agreement and a clear governance framework. The founding generation lends in the initial capital, and the loan, together with the share structure, is managed and passed down over many years as part of a deliberate succession plan.
Business sale proceeds being repositioned. A business owner who has sold a company is holding a large amount of cash and wants to reinvest it within a long-term structure. Lending the proceeds into a FIC allows that capital to be invested collectively and the share structure to begin succession planning, while the owner keeps the ability to draw capital back if needed.
Frequently asked questions
Does lending money to a Family Investment Company reduce my Inheritance Tax bill?
Not on its own. A loan to the company is an asset in your estate, valued at the amount outstanding, so lending money in simply converts cash into a loan of equal value. The Inheritance Tax benefits of a FIC generally come from the share structure and from gifting or waiving the loan over time, all of which depend on your circumstances and need specific advice.
Can I get my money back out of the FIC?
Generally yes. Repayments of your loan capital are treated as a return of your own money and are received free of income tax, provided the company has the liquidity to repay you. This flexibility is one of the main reasons families use the Director’s Loan Account route.
Do I have to charge interest on the loan?
No. Loans to a FIC can be interest-free, which many families prefer for simplicity. If you do charge interest, that interest is taxable income in your hands, and the company is generally required to deduct income tax at 20% at source and report it to HMRC.
What is the difference between a director’s loan and buying shares?
A director’s loan is repayable capital: the company owes you, and you can be repaid free of income tax. Share capital is equity that sits in the value of the company and is harder to return, usually requiring a buyback or a formal capital reduction.
Will HMRC challenge a FIC funded by a director’s loan?
FICs are mainstream planning vehicles. HMRC reviewed their use through a dedicated unit between 2019 and 2021 and found no link to non-compliant behaviour, after which the unit was closed and FICs were brought into normal compliance. Genuine commercial substance, accurate documentation and good governance all support a sound structure.
What is section 455 tax, and does it apply when I fund the FIC?
Section 455 is a charge that applies when a company lends money to a participator, such as a shareholder, and the loan is still outstanding after the deadline. It does not apply to money you lend into the company. It becomes relevant in the opposite direction, if family members draw out more than they have put in and the account becomes overdrawn. The rate is 35.75% for loans made on or after 6 April 2026, and the charge is refundable once the loan is repaid.
What corporation tax rate does a Family Investment Company pay?
A FIC is usually treated as a close investment-holding company, so it pays corporation tax at the 25% main rate on its taxable profits regardless of profit level. UK dividends received by the company are generally exempt from corporation tax, while interest, rent and capital gains are taxed at the corporate rate.
How much wealth makes a FIC worthwhile?
There is no fixed threshold. In practice, FICs are often considered where the assets involved are in the region of £2 million or more, given the set-up and running costs, but suitability always depends on the family’s objectives, the nature of the assets and the complexity involved.
Conclusion
Funding a Family Investment Company through a Director’s Loan Account can be an effective way to introduce capital into a long-term family structure while keeping control, retaining access to that capital, and creating a framework for succession and governance. The mechanics are relatively simple, the repayment flexibility is genuine, and the route fits naturally alongside carefully designed share classes and, where appropriate, trusts.
It is most likely to suit families who want to invest collectively over the long term, who value control and flexibility, and who are planning the gradual transfer of wealth to the next generation rather than an immediate gift. It is not a shortcut, and it is not a way to make value disappear from an estate. The benefits depend on the structure being designed and run properly, with realistic expectations about Inheritance Tax and a clear understanding of the obligations that come with running a company.
Every family’s position is different, and the figures and rules that apply to FICs and Director’s Loan Accounts change over time. The right structure for one family may be wrong for another, which is why tailored advice matters so much.
Speak with HeirPlan
If you are exploring whether a Family Investment Company could fit your family’s long-term objectives, the team at HeirPlan can help you think through the options, including how a Director’s Loan Account might be used to fund it. Get in touch to arrange a conversation about your goals around control, succession and intergenerational wealth, and we will help you understand whether this kind of structure is right for your family.
| Important disclaimer This article is provided for general information and educational purposes only. It does not constitute tax, legal or investment advice, and it should not be relied upon as such. Family Investment Companies and Director’s Loan Accounts involve a combination of corporate, personal and tax considerations, and the right approach depends entirely on individual circumstances. Tax treatment depends on the specific facts of each family’s situation and on current legislation and HMRC practice, both of which can change. The rates and rules referred to in this article reflect the position understood to apply for the 2026/27 UK tax year at the time of writing. Before taking any action, you should seek advice from suitably qualified professionals who can consider your own circumstances in full. |
