If you’re looking to build wealth, as a family, for the next generation to benefit from tax-efficiently, you might want to consider setting up a family investment company (FIC).
I’m going to summarise the essence of how a FIC works, so let’s use an example.
Scenario: a parent sets up a FIC and pays in £500,000 to the company. The FIC then purchases a property for £500,000. I will explain how this structure works and why it can be tax-efficient, covering inheritance tax (IHT) benefits, income tax and capital gains tax (CGT) savings and share class structuring for wealth transfer.
How the FIC purchase works
The parent incorporates a private company (the FIC) and funds it with £500,000, typically by way of a director’s loan.
For example, the company might be formed with a very small share capital (say £10 or £100 of shares), and then the parent lends £500,000 to the company. The parent can charge interest on the loan if they want to.
The FIC uses the £500,000 to purchase a property in its own name. The property (worth £500k) becomes an asset on the company’s balance sheet, and the loan from the parent is a liability of the company – as the FIC owes this back to the parent. As a result, the company’s net asset value at inception is near zero (asset £500k minus loan £500k = £0). The equity value of the FIC will, in fact, be simply the value of the shares issued (£10 or £100 as mentioned above). So, the company as an entity is virtually worthless.
The parent (and potentially other family members) hold shares in the FIC. The parent typically holds a special class of shares with voting rights (giving them control as a director/shareholder), while children or other family members can hold another class of shares. As i mentioned, because the company was initially funded by a loan, the value of the shares at the start is negligible (£10 or £100) – the loan debt back to the parent depresses the company’s net worth.
This structure, using different classes of shares, with different voting rights, allows the parent to retain control over the asset while beginning to transfer economic value to the next generation in a tax-efficient way. In fact, the key benefit of this setup is that it separates control from ownership of growth. The parent remains in charge of the company and property (deciding if and when to sell, how to manage it, etc.), but the future growth in value and income can accrue to the family members holding the “growth” shares.
Advantages of using a FIC for property ownership
Using a FIC to hold an investment property can yield several tax advantages compared to the parent owning the property personally. The main benefits relate to IHT, income tax on rental income, and CGT on eventual sale profits.
IHT benefits
Setting up and funding a FIC does not trigger an upfront IHT charge, unlike some trust transfers. The parent’s £500k loan to the company is not a gift – it’s a repayable loan, so they haven’t given away assets in a way that incurs IHT at creation. By contrast, putting £500k into a trust could incur a 20% IHT charge immediately if it takes the parent over the nil-rate band of £325k.
Because the FIC shares initially have only a nominal value, the parent can gift shares in the company to their children when their value is very low or negligible. Such a transfer of shares would be a Potentially Exempt Transfer (PET) for IHT – if the parent survives seven years after the gift of shares is made, the value of those shares is outside their estate. Crucially, the gift’s value at the time of transfer is tiny (since the company’s net worth is near zero), so even if the parent passed away within seven years, the IHT exposure on that gift would be minimal. In other words, the parent has “frozen” the value of the estate at £500k (the amount of the loan) and shifted the future growth potential to the next generation’s hands.
Once the property appreciates or generates retained profits, that growth in value accrues to the shares held by the children, keeping it outside the parent’s estate for IHT purposes.
For example, if over years the property grows from £500k to £800k in value, the £300k increase would be reflected in the company’s equity and thus in the children’s shares (assuming the parent has given them the growth shares). That £300k growth would not belong to the parent, so it wouldn’t be taxed as part of their estate on death. This can save up to 40% IHT on the growth in value. Note that the £300k due back to the parent would form part of the parent’s estate for IHT purposes, but (crucially), the £300k appreciation in value of the FIC wouldn’t.
Control retained while gifting
Unlike an outright gift of cash or property, using the FIC means the parent can give economic value to their children without relinquishing control. The parent can keep voting shares (and directorship), so they still control the company’s decisions and assets. This is a major estate planning advantage – the family can begin to benefit from the wealth, but the parent can ensure the asset is managed prudently until the next generation is ready.
Income tax advantages on the rental income
Rental income earned by the FIC will be subject to corporation tax, which is currently 25% for investment companies. This is significantly lower than the top rates of personal income tax. If the parent owned the property personally, the rent could be taxed at 40% or 45% (higher/additional rate) if it pushes them into those brackets. This means more post-tax income in the FIC is left available to reinvest or to pay down the parent’s loan.
If the property is, or becomes, mortgaged, the FIC can deduct the full interest expense against rental income for tax purposes. This is an important benefit because individual buy-to-let landlords can’t deduct all their mortgage interest – they get only a basic rate (20%) credit for interest paid. In a company, however, 100% of interest is a deductible expense, reducing the corporation tax liability on rent.
In our example, the parent provided cash, so no mortgage is needed initially; but, if the company later took out a loan (or if the parent charged the company interest on their loan), the interest would be fully tax-deductible for the FIC.
Other investments
Although not directly about property, it’s worth noting that if the FIC holds other investments (e.g. stocks), any dividends received by the company are tax-free. So, the FIC could use spare cash to invest in shares, without having to worry about paying income tax of 8.75% (basic rate), 33.75% (higher rate) or even 39.35% (additional rate) – these are the rates of tax that individuals have to pay on dividend income.
Flexibility
With different share classes, the company can choose to pay dividends to certain family members and not others, or repay the parent’s loan instead of paying a dividend. For instance, the FIC could pay a small dividend to children (who might pay little to no tax if they have low incomes), while the parent takes no dividends (avoiding extra personal tax – especially if they’re a higher or additional rate taxpayer). This flexible dividend policy (often using “alphabet shares”) allows the family to allocate income to those with lower tax rates.
Tax-free return of the initial loan
Because the parent’s funding is structured as a loan, the FIC can repay the loan principal back to the parent over time, without triggering any income tax – a loan repayment is just return of capital. For example, if the property produces surplus cash (from rent or a future sale), the company could pay the parent, say, £50k per year as loan repayment. Those payments are tax-free in the parent’s hands (unlike dividends which would be taxed). This effectively lets the parent withdraw their original £500k over time without additional tax cost, providing a tax-efficient income stream. Only once the loan is fully repaid would the parent need to rely on dividends (or salary) to extract further money, which by then might not be necessary or could be taken by the children instead.
CGT
If the property is later sold at a profit, the company will pay corporation tax on the gain, at 25% (current rate). This is very similar to the (current) 24% that an individual would pay. The additional 1% is far outweighed by all of the other tax advantages.
In our scenario, the parent provided cash to the company. Had they instead directly transferred an existing property to a FIC, that could trigger CGT on any pre-existing gain (since it’s a sale to a connected company at market value). By funding the FIC with cash (or a loan) and then the company buying the property, there’s no immediate CGT event for the parent. Additionally, gifting shares in the newly formed company to children shortly after formation does not trigger CGT because the shares have not increased in value yet (gifting them “quickly” means no gain has accrued on the shares themselves) .
Accumulation and reinvestment
One often overlooked advantage is that as long as the property isn’t sold, any increase in its value is unrealised and not taxed annually. Only the rental profits would be subject to an annual corporation tax charge. In a FIC, the rental profits (after 25% corporation tax) can be reinvested – e.g. the company could buy additional investments, or even another property. All the while, the parent can defer taking money out personally if they wish. This means that more wealth can compound within the company, at a lower tax cost. Over long periods, this roll-up of income and gains in a corporate wrapper (versus being taxed highly each year personally) can lead to substantially more wealth for the family.
In essence, the FIC acts like a family investment fund, growing assets for future generations with minimal leakage to taxes year-by-year.
Let me know if a FIC might be of interest to you.