Passing wealth to your children while retaining control

What you need to know

Passing on wealth to younger generations is a common goal for families, but many fear the worst could happen if they simply hand over cash to their children.

Instead parents often look for ways to retain some control over this wealth.

Family investment companies (FICs) can be seen as a useful part of an inheritance tax (IHT) planning strategy, but there are some drawbacks users must also be aware of.

In this article we will consider the pros and cons of using FICs to hold your investments. Please note Rothschild & Co does not provide tax advice and you should contact a tax adviser before making any financial decisions.

We work with a network of tax advisers who can help you make the best decision for your circumstances and structure an FIC to meet the needs of you and your family.

What is a family investment company?

FICs are UK resident companies that hold investments, and whose shares are normally held by a few members of the same family – typically parents and their children.

It’s this simplicity, and the fact that many investors are already familiar with the concept of a company, that makes FICs so popular.

Retaining control

A good way to highlight the benefits of FICs is to consider an example.

John has recently sold his family company and has £20 million to invest. He wishes to provide for his two sons, who are 18 and 20, but wants to ensure they remain motivated to build their careers. His solicitor suggests an FIC as an appropriate family investment vehicle.

John forms the FIC as a UK company and lends £20 million to the FIC. The funds within the FIC are invested by Rothschild & Co. Dividends received by the company are tax free and corporation tax rates are often – but not always – lower than income tax rates.

If John wants to withdraw some of his money from the FIC, the company can repay part of the loan to John and there will be no tax for John on that receipt.

John gifts some of the shares in the FIC to his children, and there is no IHT on this gift provided he survives it by seven years. Moreover, John’s solicitor has structured the children’s shares so that John retains effective control and he decides when the children receive the value represented by their shares.

The FIC also enables John to involve his sons in discussions on matters such as the purpose of the wealth and in what circumstances the children should be able to receive funds from the FIC, such as helping them buy a home.

Navigating the pros and cons

We have set out the ways families can benefit, but it’s important to note there are also several potential disadvantages of using FICs.

Families should therefore think carefully before using an FIC as, depending on the circumstances, it may be more appropriate for the family members to hold the investments in their own name.

FICs pay corporation tax and so if tax rates were to rise they would become less efficient.

For example, capital gains in FICs are generally taxed at 25% whereas the rate for an individual is currently 18% or 24%, depending on their tax position.1 Prior to 30 October 2024, the equivalent rates for most assets were 10% and 20% respectively.

It's also worth noting that FICs should be long-term vehicles, and it's not appropriate to dismantle them within a few years of their creation.

This means your children may effectively be locked into the structure. If your child wished to extract money from the company to start their own business, they would not be able to do so without triggering a tax charge.

Likewise, if the family member who created the FIC asks it to repay their loan, the company may have to sell assets, which could trigger a tax bill for the FIC.

There are also annual running costs of the FIC to consider, although these will not normally be large. Details of the company, including its value, may be a matter of public record, although the amount of information publicly available can be reduced by using an unlimited company.

Also worth noting is that FICs are becoming more common and this may result in HMRC attempting to challenge them or introducing legislation to negate their tax advantages.

From a tax perspective, FICs are not straightforward, so you should always seek advice from a tax expert, particularly if you have children under the age of 18.

Should I use a family investment company?

There's no right answer to this question as it will depend on your objectives. The answer may be yes if you wish to pass assets to your children while retaining control.

FICs can also act as an investment wrapper and are particularly useful for real estate, which cannot normally be held in other wrappers.

However, if you have no wish to undertake IHT planning, there may be more suitable vehicles to achieve compound growth on your assets.

^[1] Capital Gains Tax: what you pay it on, rates and allowances: Capital Gains Tax rates, Gov.uk

^{Past performance is not a guide to future performance and nothing in this article constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.}