Family Investment Companies – Part 2

Family Investment Companies

Today’s post is a follow-up to our recent look at family investment companies. I’ve since had a serious request from a family member to start one.

Last time

Remember, I’ve never used a “family” investment company (FIC) and before the recent article, I hadn’t done much looking into them.

  • Note also that I am not limiting the discussion to companies where all the shareholders are family members.
  • Any investment company which is under close control (ie. is controlled by five people or fewer) would fit the bill.

I have operated a trading company for more than 30 years

  • And from time to time, that company has done a modest amount of investing
  • But never enough to take it into investment company territory.
Pros and cons

The fruits of my research last time out were that FICs have two uses:

  1. They allow for fractional ownership of large assets (like houses)
    • This should lead to lower taxes through gradual (annual) changes in the ownership structure.
  2. They allow for the pooling of assets and therefore could provide greater diversification benefits than individual company members could achieve on their own.
    • Truly diversified portfolios are hard to implement with less than £100K, but ten people each subscribing £10K would be able to achieve the same result.

Unfortunately, FICs have one big drawback:

  • Profits are subject to corporation tax at 19% (18% from April 2020).

That’s only when profits are crystallised (ie. sales are made), and dividends are exempt (so long as the assets of the FIC remain below £10M).

  • But it still seemed like a deal-breaker to me.

The vast majority of my assets are already tax-sheltered, and such a structure should appeal the most to a higher-rate tax-payer who hasn’t managed to shelter his assets.


The solution came from a surprising direction.

  • I was looking into option trading strategies, which are used by a surprisingly large number of early-retirement bloggers in the US.

These options are largely traded in non-tax-sheltered accounts and some of the bloggers want to do something about that.

The answer is leverage, using a 1/(1-n) formula, where n is the tax rate you are paying.

  • This restores your returns to the pre-tax level (minus the interest paid on the loan).

For a 18% corporation tax rate, that works out to 1/82% = 122% gearing.

  • In practice, some of the returns will come as (untaxed) dividends, so gearing of 10% to 15% should be enough.

I can provide the loan to the investment company from a cash balance in my trading company, which means:

  1. A competitive interest rate (say 2% pa),
  2. No risk of the loan being recalled.

The 2% of tax-deductible interest on a 12% loan only bumps the effective tax rate up to 20%, so if we assume that one-third of this comes as dividends, we can aim for 15% or 16% gearing.

  • So let’s assume that we’ve cracked the tax problem, and look at how the FIC might work.

The company is probably not viable below a gross size of around £100K, so let’s say that’s around £85K in net assets.

  • Below this size, it might be closed down.
See also:  AIM IHT Portfolio Update 28 - September 2019

We need at least half of this to come from five people, in order to remain a close investment company.

  • Or perhaps we don’t care about that at all.

At the other end of the scale, we need to stay below the £10M cap on assets (in order to retain the dividend tax exemption).

  • Above this size, money might be returned and/or a second company started. ((A man can dream, can’t he?))

There are options to pay family members for their work in running an FIC, but the arrangement that would suit me best would be a fee paid back to my trading company.

After a lot of thought, I decided on a system that’s not unlike a hedge fund charging scheme, other than it’s ten times cheaper:

  • 0.2% pa, plus 2% of outperformance against a bespoke benchmark, with a high-water mark.

In the first year, with £75K of net assets, this would be of the order of £200 – hardly rapacious.

  • As assets grew, the company would be able to absorb other costs (eg. trading software and magazine subscriptions).

The standard approach would be followed, except that embedded potential corporation tax bills need to be subtracted from the net asset value each time.


Although the company would accept contributions at any time, it would probably make sense to only allow withdrawals once a quarter.

  • Revaluations (updating of the unit price) could happen at this time, as could fee deductions.

Share allotments (and the deduction of any performance bonus) could happen on an annual basis).

Investment strategy

The basic plan should be simple, to begin with:

  1. 80% risk-parity (volatility optimised) passive portfolio of largely low-cost ETFs
  2. 20% factor tilts (or possibly 20% of the equity portion, so closer to 15%)
  3. UK stock portion (c. 20%) in dividend stocks, to take advantage of the tax-break
    • PE / VC  allocation (around 2%) similarly held in VCTs for high dividend
    • Equity and Bond Alts could also emphasise yield (REITs, infrastructure, SONG etc)
  4. Bonds (20%) would be tilted towards high-quality Gov bonds

Active trend-following and perhaps option strategies could be added at a later date if and when the fund became large enough.

Cashflow and tax planning

Fees and trading costs should be funded from dividends.

  • Any surplus can be used for dividends and/or to pay down the gearing loan as needed.
  • Alternatively, a cash balance could be held as part of the bond allocation.

Any shortfall in income could be added to the loan.

Capital gains could be crystallised so as to fully offset the fees and loan interest.


Minimum contributions might be sized so as to allow the fund to work alongside a workplace pension:

  • The minimum workplace enrolment scheme of 8% on the national average salary of £25K pa = £2K pa

A better target would be 15% or £4K pa

  • Which gives a variance of £2K or £167 per month

So a sensible minimum regular contribution might be £100 month.


Once we had a solution for the taxation problem, everything else fell into place rather easily.

  • All that remains now is to raise the seed capital.
See also:  AIM IHT Update 8 - December 2017

If anyone is interested in hearing more about this structure, send me an email on

  • Until next time.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.

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Family Investment Companies – Part 2

by Mike Rawson time to read: 3 min