A family investment company (FIC) is a way for parents to protect assets and transfer them to their children and grandchildren. Learn more in our guide.

By contrast, an FIC is a company that holds a family's investments. The shares and loans that it holds are gifted by the older generation to the younger.

Both exist to transfer wealth from one generation to the next but they operate in different ways.

How is an FIC taxed?

The simple answer is that it's complicated. Before setting up an FIC, you'll inevitably seek financial advice and explore the tax implications at length.

But the basics are as follows. FICs are tax efficient with regard to inheritance tax – "efficient" in this case meaning you pay little or none of it.

An FIC will pay corporate tax at the main rate of 25% if its annual profits exceed £250,000.

Capital gains are chargeable to corporation tax – but at a lower rate than if they were payable by an individual.

There's no tax payable on UK (and most overseas) dividends that are received by the FIC.

Finally, there's income tax. Pension contributions and salaries paid to directors all pay income tax once the £12,500 personal allowance has been used up.

This is by no means an exhaustive account of an FIC's tax implications. Inheritance tax is a complicated proposition and FICs are no exception.

Who should set up an FIC?

The point of an FIC is to accumulate wealth over the long term. They provide ample opportunities for tax savings. Dividends received are tax-free and income can accumulate without immediate taxation. Moreover, profits have lower corporation tax rates than if they were personally held or in a trust.

Another possible advantage is that the FIC's corporate structure means that assets aren't divided in the event of a divorce. The wealth is transferred through the bloodline and isn't split between spouses – so family courts can't seize company assets when a divorce occurs.

FICs allow for detailed succession planning and continued control over assets. The purpose is to preserve – so they only apply to couples with substantial amounts of cash (and other assets) to protect.

That said, it costs money to run an FIC – and the amounts involved aren't insubstantial. FICs can also sometimes create conflicts between family members and the reporting requirements can lead to a sense of exposure.

Conclusion

Setting up an FIC can allow for assets and income to grow down the generations while reducing tax liabilities – particularly inheritance tax.

Because the point is wealth accumulation, FICs are the preserve of people with substantial assets. If this applies to you, you might want to consider setting one up as an alternative to – or alongside – a trust.

Are you looking for legal support related to wills, trusts or probate? At Milners, we have a team of experienced inheritance lawyers who can help you make arrangements that support you and your family and protect your wealth. Get in touch today for a free, no-obligation consultation.