Family Investment Companies (FIC): IHT, Share Classes & When to Use

What is a Family Investment Company?

A Family Investment Company (FIC) is a private UK limited company set up to hold and grow family investment assets. It is not a statutory term: it is an ordinary company, usually with several classes of share held by different family members. The founder typically keeps control through voting shares, while children and grandchildren hold shares carrying rights to dividends and capital. Returns inside the company are subject to Corporation Tax; shareholders pay dividend tax on what is paid out to them (10.75% / 35.75% / 39.35% for 2026/27, above the £500 dividend allowance).

The Inheritance Tax point of the structure is how value passes to the next generation. A gift into a discretionary trust is a chargeable lifetime transfer, taxed at 20% on value above the available nil-rate band, and the trust then pays charges of up to 6% every ten years and when capital leaves it (Inheritance Tax Act 1984 ss.64-66). A gift of shares to another individual is a potentially exempt transfer under IHTA 1984 s.3A: nothing is due when it is made, and it drops out of the giver's estate if they survive seven years. Specialist advice is essential: the share design has to deal with the settlements provisions (ITTOIA 2005 s.624), the close-company rules and the General Anti-Abuse Rule.

Alphabet share class structure

Share rights are set by the company's articles, so there is no standard design. A common pattern:

• Voting shares with little or no economic rights, held by the founder, giving control of the board, investment policy and dividend decisions.
• Non-voting shares with dividend and capital rights, held by adult children or grandchildren, often in separate classes so dividends can be declared on one class and not another.
• Shares for minors, sometimes held through a bare trust.

Being able to declare different dividends on different classes is the main source of flexibility, and the main source of risk. Section 624 of ITTOIA 2005 taxes income arising under a "settlement" on the settlor where the settlor or their spouse can benefit, and HMRC's manual cites Jones v Garnett (78 TC 597) for the view that a simple issue of shares can be a settlement (TSEM4105). The exemption for gifts between spouses applies only to outright gifts that are not wholly or substantially a right to income (ITTOIA 2005 s.626, TSEM4205), so a spouse share class that carries only dividend rights is exposed. Income on shares given to the founder's own unmarried minor children is taxed on the founder above a small limit (TSEM4300). Dividend waivers in favour of other shareholders are a further settlements risk.

Founding route - gift vs loan

Gift route

The founder gives shares in the FIC, or cash for family members to subscribe for shares, to other individuals. Each gift is a potentially exempt transfer (IHTA 1984 s.3A) with a seven-year clock. If the founder dies within seven years the gift counts back into the estate at its value when given, and taper relief reduces the tax on gifts made three to seven years before death (gov.uk). Gifts of up to £3,000 a year are exempt under the annual exemption. The founder cannot take the value back without it being taxed: money comes out of the company as dividends or other taxable payments.

Loan route

The founder lends cash to the FIC and family members subscribe for shares at a nominal price. Growth on the invested money builds up in their shares, while the loan stays in the founder's estate at face value and can be repaid to the founder as needed. Writing the loan off later is a transfer of value; how it is treated for Inheritance Tax needs advice for the specific structure.

Tax treatment - Corporation Tax inside, dividend tax on extraction

• Rate. A FIC that mainly holds investments is normally a close investment-holding company (CTA 2010 s.18N), and such a company cannot use the 19% small profits rate (s.18A) or marginal relief (s.18B); its taxable profits are taxed at the 25% main rate. A company that mainly lets land commercially to unconnected people is not a close investment-holding company (s.18N(2)-(3)) and can use both.
• Dividends received from other companies are generally exempt under CTA 2009 Part 9A: section 931B for small companies, the exempt classes from section 931D for others.
• Interest and realised gains are taxable profits. A company has no annual exempt amount for gains; individuals pay Capital Gains Tax at 18% or 24% in 2026/27.

Dividend tax applies only when shareholders are paid. A shareholder whose other income already uses their Personal Allowance, with basic-rate band left, pays £1,021 on a £10,000 dividend (10.75% on £9,500 after the allowance). On profit taxed at 25% in the company and then paid out, the combined rate is 33.06% for a basic-rate shareholder, 51.81% at higher rate and 54.51% at additional rate. Dividends the FIC itself received tax-free bear only the shareholder's dividend tax.

For comparison, an accumulation or discretionary trust pays Income Tax at 45% on most income and 39.35% on dividends, with a tax-free amount of normally £500, and its gains are taxed at 24% above a £1,500 annual exempt amount (gov.uk).

FIC vs trust: the Inheritance Tax charges on £5,000,000

Illustration only, assuming the founder has made no earlier chargeable transfers so the full £325,000 nil-rate band is available, and the trustees pay the tax.

• Discretionary trust: entry charge (£5,000,000 - £325,000) x 20% = £935,000 when the trust is set up, then up to 6% of the value above the nil-rate band at each ten-year anniversary and a proportionate charge when capital leaves.
• FIC, gift of shares to family: no tax when the gifts are made. If the founder dies within seven years, the gifts count back into the estate at their value when made, with taper relief on gifts made three to seven years before death. After seven years they are outside the estate. The shares are then part of each recipient's own estate.

Income and gains are taxed differently in the two structures (see above), so which leaves more after tax depends on the investments, how much is paid out and to whom. Rates and thresholds change with each Finance Act; take specific advice before setting either up.

When a FIC does not fit

• The family needs the income now. Profit taxed in the company and then paid out is taxed twice, at the combined rates shown above.
• The assets are a trading business. Trading company shares can qualify for Business Relief (100% up to £2,500,000 per person from 6 April 2026, 50% above it); FIC shares do not, because Business Relief excludes businesses that mainly make or hold investments (gov.uk).
• The founder may not survive seven years. Gifts made within seven years of death count back into the estate.
• The property is a home the family uses. A company buying a dwelling over £500,000 can pay 17% Stamp Duty Land Tax, and owning one brings in the Annual Tax on Enveloped Dwellings (£4,600 to £303,450 a year for 1 April 2026 to 31 March 2027) unless a relief such as commercial letting applies.
• The family is international. Non-resident shareholders and founders who are not long-term UK residents face different rules.

Risks and common pitfalls

• Settlements provisions (ITTOIA 2005 s.624). Income can be taxed on the founder if the share design gives them or their spouse a benefit, or if income-only shares are given to a spouse (see above).
• Loans to participators (CTA 2010 s.455). If the FIC lends to a shareholder, it owes tax at the dividend upper rate (35.75% for 2026/27) on a loan still outstanding when the tax falls due, repayable once the loan is repaid.
• Gift with reservation (Finance Act 1986 s.102). If the founder gives shares but keeps a benefit from them, they stay in the estate.
• Pre-owned assets (Finance Act 2004 Sch. 15). An Income Tax charge can apply if the founder uses land or chattels they used to own that the company now holds.
• General Anti-Abuse Rule (Finance Act 2013 Part 5) for arrangements that are abusive.

Related calculators and guides

• Inheritance tax calculator - personal-estate IHT projection with Nil Rate Band, Residence Nil Rate Band taper and gifts.
• IHT gift taper calculator - the seven-year clock and taper relief.
• Corporation tax calculator - company-level Corporation Tax.
• Dividend calculator - shareholder dividend tax on extraction.
• Salary vs dividend calculator - director extraction route comparison.
• Capital gains tax calculator - personal CGT for comparison.