There have been a lot of inheritance tax (IHT) changes in the recent Budget. High net worth families and businesses have had their succession planning options curtailed. Robert Davies from Foot Anstey takes a look at whether Family Investment Companies (FICs) are a tool to consider post Budget 2024.
IHT- What’s Happened?
The rates of IHT have not changed from 20% on lifetime chargeable transfers, and 40% on death. The Nil Rate Bands remain frozen at £325,000 per person, transferrable between spouses, plus £175,000 when passing residential property to direct decedents. When put together there are up to £1 million of allowances for a married couple.
However, the Budget has brought extra assets within the scope of IHT. Most significantly:
Pensions – most pensions are now brought within a person's estate on death from April 2027
Agricultural Relief (APR) and Business Relief (BPR) – farmers and business owners can only claim £1 million relief against agricultural or business property and qualifying shares. Anything over this can only attract 50% IHT relief. The £1million is a total allowance per person, across both reliefs. Any unused relief cannot be transferred to one's spouse.
This means that for anyone with pensions, or qualifying assets under either relief, the scope for IHT to apply on their death may broaden, as discussed below.
Pension Pot Holders
The new IHT treatment of pensions is being widely criticised across the industry. Most unused pension funds are due to fall within a person’s estate from April 2027. The reason stated is to prevent pensions from being used as a vehicle to pass down assets IHT free.
Although there is a consultation on how this will work in practice a U- turn on this policy is not expected. A pot of money that previously could be safely ignored for IHT planning purposes should now be reviewed.
Farmers & Business Owners
Before the Budget business owners and farmers have received up to 100% IHT relief on qualifying assets on death. If you met the criteria, IHT was therefore unlikely to be a problem for the farming or business communities. However, from April 2026 any assets qualifying for business property relief (BPR) or agricultural property relief (APR) will have a combined threshold of £1,000,000 before becoming subject to inheritance tax. Assets over the £1 million can attract 50% relief but the remainder is charged at the usual 40% IHT rate on death.
Farmers and business owners have the majority of their liquidity invested in their business and it is not easily realised by the younger generation on death. For many this is potentially a very hefty tax bill to be raised from non-liquid assets and farmers and business owners alike will be looking at their options.
Buy-To-Let Property Owners
Buy-to-let property has also become a less attractive prospect in recent years as a vehicle for intergenerational wealth. Furnished holiday lets no longer have favourable tax treatment (from April 2025) and the relevant rates of stamp duty land tax have increased in the Budget. Mortgage rates continue to be high in comparison to recent memory.
AIM Share Owners
Until the Budget, investing in AIM shares was an attractive succession planning option for some people as the shares often attracted Business Property Relief at 100%. From 6 April 2026 this relief drops to 50% (with no £1m allowance).
Is Gifting The Answer?
For those who can afford to pass wealth down during their lifetime, the rules remain unchanged for gifting. A gift to anyone other than one's spouse (which is ignored for IHT purposes) falls outside of the estate for inheritance tax, provided at least seven years have passed since the gift.
However, gifted assets are outside the control of the donor. The recipient may be too young to manage large sums of money or the asset may be at risk in the course of a future divorce or bankruptcy.
It is also important to note the gift must be a true one from which the donor no longer benefits. Gifts in which the person making the gift reserves a benefit- for example 'gifting' a house but continuing to live in it will fall foul of the 'gifts with reservation of benefit' rules and has adverse tax consequences.
Should A FIC Be Part Of The Wealth Structure?
FICs have been growing in popularity for some time as an option for intergenerational wealth transfer. The tax rules applying to FICs are largely unchanged following the recent Budget and indeed with increasing rates of capital gains tax the relative tax advantage may have increased.
What Is A FIC And How Does It Work?
A FIC is a private company typically used to hold, manage, and pass down family wealth. It can be Limited, or Unlimited (with the latter requiring far less Companies House disclosure, but providing less liability protection). It has articles of association and is controlled by directors. It allows family members to place assets, such as investments or property, within a company structure.
The shareholders would normally be different members of the family, with the directors usually being the founders initially with this changing over time.
A FIC can accumulate wealth over time, with the directors having full control over when payments are made to shareholders. This can be by way of loan repayments, or income payments in the form of dividend payments, interest payments or a salary to employees and directors.
FICs therefore offer flexibility in ownership, voting and dividend rights, allowing families to structure them according to their specific needs and goals.
Tax advantages are the other important consideration.
Value And Future Growth Given Away - Control Retained
When family members gift FIC shares to younger generations, this can qualify as a Potentially Exempt Transfer. Provided the donor survives for seven years after the gift, the shares’ value will pass from their estate for IHT purposes.
If the gifted shares increase in value, this growth benefits future generations without being subject to IHT on the donor’s death. FICs allow specific "growth shares" to maximize this advantage, reducing IHT for high-growth investments.
Older generations would usually retain some shares in the FIC, often those with voting rights, allowing them to control the FIC and continue to receive income if needed.
Tax On Income
A FIC is subject to corporation tax on its income. This rate, between 19% and 25%, remains considerably lower than the higher income tax rate (currently 45%). Retained profits within the FIC allow for more efficient reinvestment, amplifying the long-term compounding effect and making FICs suitable for those looking to preserve and grow wealth within the company over time.
Tax On Gains
The 2024 Budget has increased CGT rates on most assets. Any gains on assets within the FIC will be subject to corporation tax rather than CGT, which can be a more tax-efficient option in the long term, particularly for high-growth investments. However, transferring non-cash assets into a FIC can trigger an initial CGT charge at the point of set up.
If the FIC holds shares in a trading business, it may be possible to sell the business without an immediate tax liability for the FIC. This is an added advantage for those looking to sell a family business, though extracting funds from the FIC post-sale should be strategically planned.
Reinvestment Potential
Dividends paid into the FIC from its investments—such as a share portfolio within the FIC—are mostly exempt from corporation tax. This feature allows income to be reinvested with minimal tax impact. When dividends are distributed from the FIC to family members, they are subject to income tax beyond the £500 tax-free allowance.
Are FICs Right For Me?
In our experience people tend to see the most benefit from a FIC if they are:
Business owners; and/or
Hold cash (from either selling their business or an inheritance), to deploy into a wealth structure
However, FICs can hold any asset type and so can be considered in a variety of situations. As part of a review of succession plans, careful consideration of a FIC should be undertaken.
About the Author - Robert Davies is a Managing Associate at Foot Anstey LLP. If you would like to discuss your own situation or that of a client, and whether a FIC is right for the context, please get in touch with Robert or a member of the Succession and Tax team to discuss further.
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