Families looking to pass wealth to children and grandchildren increasingly encounter Family Investment Companies (FICs) as a possible solution.

For some families, an FIC can provide an attractive combination of control, flexibility and long-term generational wealth planning. However, it is not the only option.

A more traditional Gift & Loan Trust can sometimes achieve surprisingly similar objectives, potentially with less complexity.

So, how do the two compare – and when might the additional complexity of a Family Investment Company be worthwhile?

What is a Family Investment Company?

A Family Investment Company is a private company established to hold and manage family wealth.

There is no special tax regime specifically for FICs. Instead, they use the normal legal and taxation framework applying to companies.

The company can be established with different classes of shares carrying different rights. This can potentially allow parents to retain control and, depending on the structure, rights to income or capital, while other family members hold shares intended to benefit from future growth.

This flexibility is one reason FICs have become an increasingly discussed option for families with substantial wealth.

What is a Gift & Loan Trust?

A Gift & Loan Trust uses a different legal structure but can sometimes pursue a similar financial planning objective.

Typically, an individual establishes a trust with a relatively small gift and subsequently lends a larger sum to the trustees.

The trustees invest the money for the trust beneficiaries.

Importantly, the loan remains repayable to the person who made it. It therefore remains an asset of the lender and will normally remain relevant when considering their estate for inheritance tax purposes.

However, subject to the structure and tax rules, future investment growth may accrue within the trust for the benefit of the beneficiaries rather than increasing the value of the lender’s estate.

This can make a Gift & Loan Trust useful where someone wants to undertake generational wealth planning but is uncomfortable giving away immediate access to a substantial amount of capital.

Are FICs and Gift & Loan Trusts more similar than they first appear?

In some circumstances, yes.

Consider parents with £1 million that they do not expect to spend but are not yet comfortable giving away completely.

With a Gift & Loan Trust, they might lend capital to trustees. The outstanding loan remains theirs, while future investment growth may accrue for the trust beneficiaries.

A loan-funded FIC can have some economic similarities. The parents may retain a loan to the company, while shares held by other family members are intended to participate in future growth.

In both cases, therefore, an important planning concept can be separating existing capital from future growth.

However, the similarity should not be overstated. A trust and a company are fundamentally different legal and tax structures, and those differences can become significant over time.

What are the potential advantages of a Family Investment Company?

One potential attraction is control.

Different share classes can potentially provide different voting, income and capital rights. Parents may therefore be able to retain considerable involvement in how family wealth is managed while introducing the next generation to the structure.

Another potentially important difference is income.

Depending on how the FIC is structured, parents may retain shares carrying rights to dividends. This can be useful where they want future generations to participate in capital growth while retaining some entitlement to income themselves.

Investment taxation can also make companies attractive in some circumstances. Many dividends received by UK companies are generally exempt from corporation tax, subject to the detailed rules.

For an equity-based portfolio where income is intended to remain within the company and be reinvested for many years, this can be significant.

However, it should not be confused with saying that an FIC is simply a “tax-free” or “25% tax” investment vehicle.

Different types of investment return receive different tax treatment, and further tax may arise when shareholders eventually extract money from the company.

What is a close investment-holding company?

Many FICs established primarily to hold family investments may fall within the rules applying to close investment-holding companies.

This is an important detail when considering claims about favourable corporation tax rates.

Broadly, close investment-holding companies do not qualify for the small profits rate of corporation tax or marginal relief and are generally subject to the main corporation tax rate on their taxable profits.

This illustrates why comparing an FIC with a trust simply by looking at headline tax rates can be misleading.

The composition of the portfolio matters. Dividend income, interest and capital gains can receive different tax treatment, as can money eventually distributed to family members.

What are the potential advantages of a Gift & Loan Trust?

For some families, simplicity and proportionality may be among its attractions.

If the objective is primarily to retain access to the original capital while allowing future growth to benefit children or grandchildren, a Gift & Loan Trust may provide a relatively straightforward way of pursuing that objective.

The lender can normally request repayment of some or all of the outstanding loan, subject to the trust’s terms and available liquidity.

That can be valuable for someone who wants to begin generational wealth planning but remains uncertain about how much capital they might need later in retirement.

A Gift & Loan Trust may therefore deserve particular consideration where the family does not require the more extensive governance, income and ownership flexibility available through an FIC.

What about inheritance tax charges on trusts?

This is an important difference.

Many discretionary trusts fall within the inheritance tax “relevant property” regime. This can potentially result in inheritance tax charges at ten-year anniversaries and when property leaves the trust.

Those rules can be an important consideration when comparing a trust with an FIC.

However, simply saying that “trusts pay 6% every ten years” is an oversimplification. The calculation depends on the circumstances and value subject to the relevant property regime, and the treatment of liabilities and the outstanding loan requires appropriate technical consideration.

A Family Investment Company does not itself fall within the discretionary trust relevant-property regime.

That does not, however, mean the family wealth automatically falls outside inheritance tax.

The company’s economic value is ultimately reflected in its shares and liabilities. Loans owed to parents and shares retained by them can themselves have value within their estates.

The important question is therefore not simply:

“Is the money inside an FIC?”

It is:

“Who owns the economic rights to the family wealth, what are those rights worth, and whose estate does that value form part of?”

Can parents still benefit from the money?

This can be one of the most important distinctions between the two structures.

With a Gift & Loan Trust, the parents’ retained economic interest will typically centre on their right to repayment of the outstanding loan. Allowing the person establishing a trust to benefit from trust property can have significant tax consequences and requires careful consideration.

An FIC can potentially provide greater flexibility.

Depending upon the share structure, parents may retain control, capital rights and/or income rights while other shares participate in future growth.

But there is an important trade-off.

Rights retained by parents may themselves have value.

An FIC should therefore not be viewed as a mechanism through which parents can retain all the economic benefits of their wealth while simultaneously removing all its value from their estates.

Professional valuation and tax advice may be required when establishing and subsequently changing a share structure.

How much money do you need for a Family Investment Company?

There is no statutory minimum.

The more useful question is whether the potential benefits justify the additional cost and complexity.

Establishing an FIC can involve specialist tax and legal advice, company formation, bespoke Articles and potentially valuation work.

There will also normally be ongoing company accounts, corporation tax compliance, Companies House requirements and professional fees.

Those costs may be relatively modest compared with several million pounds of family capital intended to remain invested for decades.

They can be much more significant as a proportion of a smaller investment.

Consequently, there is no sensible universal rule such as “you need £1 million for an FIC”. The appropriate answer depends upon the amount involved, investment strategy, family objectives, timescale, expected withdrawals and professional costs.

For some families, a simpler solution may accomplish most of what they actually need.

FIC vs Gift & Loan Trust: what should families compare?

Rather than starting with the tax rate, we believe it is more useful to start with the family.

Questions might include:

• How much capital do the parents need to retain for their own lifetime?
• Do they need income from the assets, or simply access to capital?
• How much are they genuinely comfortable giving to the next generation?
• How important is retaining control?
• Is the objective to benefit children today or accumulate wealth over several decades?
• How should different children or future generations participate?
• What happens if family circumstances change?
• How will investments be taxed while they accumulate?
• How will family members ultimately receive money?
• What are the establishment and ongoing costs?
• What happens on death, incapacity, divorce or disagreement?
• Would a simpler structure achieve substantially the same objective?

Only after answering those questions does it make sense to decide which legal and tax structure deserves further investigation.

Is a Gift & Loan Trust an alternative to a Family Investment Company?

Potentially, yes.

Where the primary objective is to retain access to existing capital while allowing future investment growth to benefit the next generation, a Gift & Loan Trust may be an alternative worth considering.

Where parents also require income rights, more sophisticated family governance, different economic rights between family members or a long-term corporate vehicle for accumulating substantial family wealth, an FIC may offer additional flexibility.

Neither structure is inherently better.

The question is whether the additional capabilities of an FIC are genuinely valuable to the particular family and sufficient to justify its additional complexity.

Planning first, structure second

Generational wealth planning should not begin with a trust, company or tax product.

It should begin with the family.

Before transferring substantial wealth, parents need to understand how much they are likely to need for their own future, including retirement expenditure, later-life costs and unexpected events.

Financial planning can help establish how much capital might genuinely be surplus and explore the consequences of transferring different amounts.

Once those objectives and constraints are understood, appropriate tax and legal structures can be considered.

For one family, that might mean straightforward gifts. For another, it could involve a Gift & Loan Trust. For families with substantial wealth and more complex requirements, a Family Investment Company may warrant serious consideration.

Sometimes a combination of approaches will be appropriate.

The most sophisticated solution is not necessarily the one with the most complicated structure. It is the one that best fits what the family is actually trying to achieve.

Working with your accountant and solicitor

Family Investment Companies sit at the intersection of financial planning, taxation and law.

Where an FIC appears worth considering, detailed specialist tax and legal advice will normally be required.

At Rowley Turton, our role is to help families establish what they want their wealth to achieve, how much they can afford to transfer and how different approaches could affect their wider financial plan.

We can then work alongside your existing accountant and solicitor or, where appropriate, introduce suitably qualified professionals to advise on the detailed tax and legal structure.

The objective is not to begin with an FIC or a trust.

It is to begin with your family and identify the approach that best supports your long-term plans.

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This article provides general information only and does not constitute personal financial, tax or legal advice. Tax treatment depends on individual circumstances and may change. Trust and company taxation can be complex, and appropriate professional advice should be obtained before establishing or altering any structure.