01

How a FIC is structured — share classes, loan accounts and control mechanisms

A FIC is established as a standard UK private limited company under the Companies Act 2006. The distinctive feature is the bespoke share structure — typically two or more classes of shares with different rights over voting, income and capital. The Articles of Association and any shareholder agreement define these rights precisely.

A classic FIC share structure: A ordinary shares — full voting rights, full economic rights (income and capital), held by parents. B ordinary shares — no voting rights (or limited voting rights), full economic rights, gifted to children or held in trust for them. C ordinary shares — full voting rights, no economic rights, held by parents as a 'veto share' for additional control. The parents retain complete control of the company (via A and C shares) while economic interest (the investment growth) can be transferred to children through B shares.

Funding the FIC: the most common approach is for parents to lend capital to the FIC on commercial or interest-free terms. A £1 million loan from parents to the FIC: the loan is an asset of the parents' estate (they can demand repayment at any time), but all investment growth on the £1 million accrues within the company, outside the parents' personal estate. Gifting shares (B ordinary shares) to children transfers the economic interest in the growth — each share gift is a potentially exempt transfer for IHT purposes, starting the seven-year clock.

Alternatively, parents can subscribe for shares at market value — but this uses taxable funds and does not achieve the same leveraged effect as a loan. The loan approach is preferred by most tax advisers for its flexibility and the retained access to capital that the loan represents.

02

The tax efficiency case — precise numbers for income, gains and dividends

The FIC's tax efficiency arises from three distinct mechanisms, each quantifiable.

Mechanism 1 — Income tax deferral: investment income received by the FIC is taxed at 25% corporation tax (or 19% if annual profits are below £50,000). The same income received personally by an additional rate taxpayer is taxed at 45% (interest) or 39.35% (dividends). The annual saving on £50,000 of investment income: 45% - 25% = 20% = £10,000 per year. Compounded over 20 years at 6% reinvestment within the FIC versus personal taxation, the FIC portfolio grows to approximately 35% more than the personally held alternative.

Mechanism 2 — Dividend exemption: dividends received by a UK company from another UK company (and most overseas companies under the CFC rules) are exempt from corporation tax under the dividend exemption in CTA 2009. A FIC holding a portfolio of UK and major overseas equities receives dividend income with zero corporation tax — a significant advantage over personal holding where dividend tax applies at up to 39.35%.

Mechanism 3 — CGT versus corporation tax: capital gains within a FIC are subject to corporation tax at 25% — not CGT at 24% for higher rate taxpayers. The rates are similar but the FIC's ability to reinvest the after-tax gain without immediately distributing to shareholders means the timing of tax is deferred. The FIC pays 25% on the gain; the shareholders only pay personal tax (dividend tax or CGT on share disposal) when they receive distributions or sell their shares.

03

IHT planning through the FIC — gifting shares and the PET mechanism

The FIC provides IHT planning primarily through two mechanisms: the gift of shares as potentially exempt transfers, and the accumulation of growth outside the parents' estate through the loan structure.

Gifting B ordinary shares to children: each gift of shares is a PET — if the parents survive seven years from the date of the gift, the shares (and all accumulated value) pass outside the estate with no IHT. Unlike a gift into a discretionary trust (which is an immediately chargeable transfer and may trigger an entry charge), a gift of company shares to children directly is a PET — no immediate IHT.

The annual gift exemption of £3,000 per parent per year can be used to gift B ordinary shares valued at £3,000 each year — permanently outside the estate immediately. As the company grows, the value of B shares increases — the annual gift of £3,000 of shares becomes increasingly valuable as the FIC portfolio grows.

Valuation discount: ordinary shares in a private company are typically valued at a discount of 15 to 35% to net asset value for transfer purposes — reflecting the lack of marketability and minority shareholding status. This discount reduces the value of each share gift for IHT purposes, allowing more economic value to be transferred for the same IHT cost. A FIC with £1 million of net assets: if the B shares carry a 30% minority discount, their IHT value is 70% of the proportionate net asset value — allowing 30% more value to pass outside the estate per gift.

04

Setup, running costs and the minimum asset threshold

A FIC is not a low-cost structure. The setup and ongoing costs must be weighed against the tax efficiency gains — and this calculation determines the minimum asset level at which a FIC makes economic sense.

Setup costs: solicitor fees for bespoke articles of association with multiple share classes — £3,000 to £8,000. Additional solicitor fees for shareholder agreement and loan documentation — £1,000 to £2,000. Total setup: £4,000 to £10,000.

Ongoing annual costs: corporation tax return preparation — £1,000 to £2,000. Statutory accounts preparation — £1,000 to £1,500. Companies House confirmation statement — £34. Investment management fees (if an external manager is used) — 0.5 to 1% of assets per year. Total annual professional costs excluding investment management: £2,000 to £4,000.

Break-even analysis: a FIC generating £20,000 in annual tax savings (versus personal holding) at a total annual cost of £3,000 has a net annual benefit of £17,000. The £7,000 setup cost is recovered in five months. For a FIC with £500,000 in assets generating £25,000 of annual income at the corporation tax saving rate of 20%: annual tax saving = £5,000. Annual running costs = £3,000. Net annual benefit = £2,000 — marginal. For £1,000,000 of assets and £50,000 income: annual tax saving = £10,000. Annual running costs = £3,000. Net annual benefit = £7,000 — clearly justified.

The practical minimum: most specialists recommend a FIC for families with investable assets of £500,000 or more. Below this threshold, the annual ISA allowances (£20,000 per person) and pension contributions should be maximised first — these provide better returns per pound of effort and cost than a FIC for smaller portfolios.

05

Extracting value from the FIC — dividends, salary and loan repayments

Accumulating wealth inside a FIC is only valuable if that wealth can be extracted efficiently when needed. The FIC's efficiency advantage is at its greatest when profits are retained and reinvested — the corporation tax saving compounds over time. But when income needs to be distributed to family members, the extraction method determines the overall tax efficiency.

Dividends from the FIC to shareholders are taxed at dividend tax rates: 8.75% basic rate, 33.75% higher rate, 39.35% additional rate. For family members who are shareholders at the basic rate, dividends from the FIC at 8.75% are highly efficient. A FIC that distributes primarily to children (B shareholders) who are basic rate taxpayers achieves total tax of 25% corporate (on income) plus 8.75% dividend tax on distribution — versus 45% personal rate for the parents holding the same investments.

Salary: where a FIC has trading-like activity (active investment management, property rental management), it may pay a salary to directors including the parents. Salary is deductible for corporation tax and provides earnings for pension contribution purposes. However, salary above the personal allowance attracts PAYE income tax and NIC — typically less efficient than dividend extraction from a properly structured FIC.

Loan repayment: the parents' loan to the FIC can be drawn down at any time — this is a return of capital, not income, and has no income tax consequence. Loan repayments provide the most tax-efficient form of liquidity from a FIC for the parent generation.