Wealthy families exploiting loophole to dodge inheritance tax | Personal Finance | Finance

Families are increasingly using obscure company structures to legally sidestep inheritance tax.

Accountants and lawyers report a surge in demand for Family Investment Companies (FICs) – little-known legal entities that allow the rich to hand down millions to their children while avoiding death duties.

The uptick comes in the wake of the March Budget and warnings that a future Labour government could squeeze Britain’s wealth even further.

The Chancellor Rachel Reeves has already confirmed plans to bring untouched pension pots into the inheritance tax (IHT) net from April 2027.

The Office for Budget Responsibility now predicts 10% of deaths will trigger an IHT bill by the end of the decade – a sharp increase from the historic average of around 4%.

Chris Etherington, of tax advisory firm RSM, said FICs are not always the right answer for families “but there has been a spike in interest in them since the Budget”.

Under current rules, estates worth more than £325,000 are hit with a 40% IHT charge, rising to £1 million for couples who pass on the family home to their children. But families using FICs are able to gift company shares instead of cash or assets directly – keeping control while shifting wealth out of their estates.

Nick Sinclair-Wilson, of BRI Wealth Management, confirmed: “There has undoubtedly been an uptick in demand” for FICs, which are being embraced by both the wealthy and ultra-wealthy as a more flexible alternative to traditional trusts.

Firms such as Lowry Legal and Ella Rose Financial echoed the trend, telling the Telegraph there has been a “noticeable rise in interest” in recent months.

FICs have become particularly appealing following the Chancellor’s decision to freeze IHT thresholds despite soaring house prices, which has dragged more middle-class families into the tax net.

Mr Etherington added: “FICs can replicate some advantages of a trust by allowing assets to effectively be gifted to family members through the shares and loans, while retaining control during the parents’ lifetime.

“From an inheritance tax perspective, this is efficient, as it can remove value from the parents’ estates, which might otherwise be subject to 40% inheritance tax.”

He said another key advantage is the absence of an upfront 20% charge – the rate applied to large gifts into trusts – making FICs more cost-effective and less restrictive.

Since 2006, lifetime gifts into trusts above the £325,000 threshold have been subject to a 20% charge, limiting their use among families with substantial wealth. By contrast, there is no cap on how much can be gifted into a FIC.

David Denton, of Quilter Cheviot, said this makes FICs “very attractive” to the wealthy. “No lifetime inheritance tax charges arise on transferring sums, irrespective of the value transferred,” he explained.

“Sums held within the FIC are outside of the founder’s estate for inheritance tax purposes, so provided the founder survives for seven years from creating the FIC, amounts held within it will escape inheritance tax on their death.”

Tom Minnikin, of tax specialists Forbes Dawson, said interest has surged in the last year. “We have seen a lot of enquiries about FICs. We are looking after about 20 to 30,” he said.

“They’ve grown in popularity in recent times. Clients are more comfortable with the concept of how a limited company operates compared to trusts, which have a certain enigma attached to them.”

Camilla Bishop, of Keystone Law, said: “The ongoing tightening of the rules on inheritance tax combined with the increase in the rates of capital gains have resulted in more interest generally in the use of a FIC – particularly where clients have significant liquid assets.”

While setting up a FIC is not cheap – with fees ranging from £5,000 to £20,000 depending on the complexity and provider – supporters say the long-term tax savings can be vast.

Crucially, FICs also benefit from paying corporation tax at 25%, compared to income tax rates that can reach 45% for top earners – making them not only a weapon against IHT but also an ongoing tax-efficient structure for investing wealth.