How family investment companies are taxed

Tax is the reason many families look at a family investment company, and the reason many get it wrong. A FIC does not avoid tax. It moves it: investment returns are taxed inside a company at one rate, wealth is passed on with a different inheritance tax profile, and money coming out is taxed in the hands of whoever receives it. This guide sets out where the tax arises and the rules that need care.

The rates in this guide are for the 2026/27 tax year and can change. This is general information, not tax advice.

Tax inside the company

A family investment company pays corporation tax on its profits.

• Rate. The main rate is 25%. A close company whose business is holding investments, as many FICs are, cannot use the lower small profits rate, so the 25% rate normally applies from the first pound.
• Income. Interest, rent and similar income are taxable. Dividends received from other companies are generally exempt from corporation tax, which makes a portfolio of dividend-paying shares a natural fit. Bonds and other debt investments are taxed under the loan relationship rules, which can charge profit as it is recognised in the accounts, before any cash arrives, so they need particular care.
• Gains. Gains on investments are charged to corporation tax at the same 25%. That is slightly more than the 24% higher rate of capital gains tax for an individual, and there is no annual exempt amount for a company, so every gain counts. Gains are not where a FIC saves tax.
• Costs. The reasonable costs of managing the investments, such as investment management fees and the company's running costs, can usually be deducted.
• Losses. Losses on investments can generally be set against the company's gains and other profits, subject to the usual rules.

For a family whose individuals would pay higher or additional rates of income tax on interest and rent, a flat 25% inside the company can be lower, and dividends received are generally exempt. The benefit is largest when income stays in the company and compounds. On gains there is no saving.

Tax when money comes out

The company's profit belongs to the company until it is paid out, and the tax on paying it out depends on how it leaves.

• Dividends. Paid to shareholders and taxed in their hands at dividend rates, after a small annual allowance. The rates rise with the shareholder's income, so a dividend to an adult child with little other income can be taxed lightly, and a dividend to a higher-rate taxpayer more heavily. This is why the dividend policy matters.
• Repayment of a founder's loan. If the founders funded the company partly by loan, repaying the loan is repayment of capital rather than income, and in the normal case is not taxable to them. It is the main way a founder takes money back. If the loan carries interest, the founder is taxed on it and the company's relief for it has conditions, so interest should be considered carefully.
• Loans to shareholders. If the company lends to a shareholder or a connected person and the loan is not repaid within nine months of the end of the accounting period, the company pays a tax charge on it, refunded when the loan is repaid. The company should not be used as a personal bank account.
• Winding up. Distributions on a winding up and returns of capital have their own treatment and should be planned for rather than left to chance.

The practical effect is that a FIC suits money that will stay invested for a long period, and a structure whose profits are paid out every year loses much of its attraction.

Tax on funding the company

• Cash. Subscribing cash for shares, or lending it to the company, does not itself create a tax charge, which is why most FICs are funded with cash.
• Existing investments and property. Transferring them in is a disposal for capital gains tax at market value, and stamp duty land tax and other charges can apply to property. These costs are often why existing assets are left outside.
• Homes and personal-use assets. A company holding a home or other residential property can face extra stamp duty land tax, the annual tax on enveloped dwellings and the loss of the main residence exemption, and assets used personally, such as art, yachts or aircraft, can bring benefit-in-kind charges. They usually sit better outside a FIC.
• Shares given away. Giving shares to someone is a disposal for capital gains tax at market value, but a newly formed company's shares often have little value when they are given, so the charge is typically small or nil.

Inheritance tax

Inheritance tax is charged at 40% on the part of an estate above the nil-rate band. The FIC is used to reduce the value of the founders' estates.

• Gifts to individuals. Normally potentially exempt transfers. If the donor survives seven years, there is no inheritance tax on the gift; if they die within seven years it is brought back into charge, with a reducing rate for deaths after the third year.
• Gifts into trust. Lifetime gifts into most trusts are chargeable when made, with an entry charge on the amount above the nil-rate band, and trusts then bear periodic and exit charges.
• Growth. After the gift, growth in the value of the shares belongs to the recipient and is outside the founders' estates. This is where most of the benefit lies.
• What stays in the estate. Money the founders lend to the company remains part of their estate until it is repaid or given away, and voting shares they keep can carry a value of their own even when they carry no right to income or capital. The capital put in is not removed from the estate by a FIC.
• Valuation. A minority holding in an unquoted company can be valued below its pro rata share of the whole, and the founders' own holding may also attract a discount. HMRC has views on how discounts are applied, so the valuation is a point for advice.
• No business property relief. A company that holds only investments does not qualify for business property relief.

The benefit depends on the founders not keeping a benefit from the shares they have given away. The rules on gifts with reservation of benefit bring the shares back into the estate if they do, so the way control is kept and the way money is taken out must be designed with those rules in mind.

The anti-avoidance rules to know

Several rules exist to stop families gaining tax advantages from arrangements like these, and each shapes how a FIC is built:

• Settlements legislation. Where a person arranges for income to be paid to someone else, in a way that benefits the person arranging it, the income can be taxed on them. Disproportionate dividends on specially created classes of shares are the main risk.
• Gifts to minor children. Income of more than a small amount from a parent's gift to an unmarried minor child is taxed on the parent.
• Gifts with reservation of benefit. If the person who gives shares keeps a benefit from them, the shares remain in their estate for inheritance tax.
• Loans to participators. The charge described above.
• Transactions in securities. HMRC can counteract an income tax advantage obtained from certain transactions, including some loan repayments and returns of capital, with a clearance procedure available in advance.
• Dividend waivers. A shareholder waiving a dividend can itself be treated as a settlement.

None of these makes a FIC unworkable. They mean the Articles, the shareholders' agreement, the share classes and the dividend policy must be designed together, with the tax planning in the same conversation.

What a good plan looks like

A sound FIC tax plan usually:

1. funds the company mainly in cash, partly as shares and partly as a loan;
2. gives shares to family members in a way that avoids benefit for the founders;
3. sets a dividend policy that reflects the shareholders' tax positions and the anti-avoidance rules;
4. keeps clear records of loans, dividends and decisions;
5. and is reviewed every year, because the rules and the family both change.

HMRC has examined family investment companies as an inheritance tax planning vehicle. The rules have not been changed specifically for them, but change remains possible, which is a further reason to review the structure regularly.

Our family investment company service covers the design and the ongoing tax planning, and the guide to setting one up shows how the steps fit together.