Corporation tax on a family investment company

It is a close company that does not exist wholly or mainly for a permitted purpose, such as trading, letting land commercially or holding trading subsidiaries. A typical family investment company that holds a portfolio of shares, funds, bonds or cash falls into this category. The label matters because such a company cannot use the 19% small profits rate or marginal relief, and pays corporation tax at 25% on all its taxable profits.

Those that exist wholly or mainly for a permitted purpose. A company letting land commercially, for instance to unconnected tenants, is outside the label, as is one whose main business is holding shares in trading or commercially letting subsidiaries. A letting to the company's connected persons or their relatives is not commercial. A company that mainly holds a portfolio is caught, even if it also owns a trading subsidiary.

Usually not. Dividends and other distributions received by a UK company are chargeable to corporation tax only where they are not exempt, and most dividends on a portfolio of UK and overseas ordinary shares are exempt under the Part 9A rules. That lets the company reinvest them in full. Income tax arises only when the company pays dividends to its shareholders. Exceptions exist, so the position for each holding is checked.

Often, but it depends on the payer and the class of shares. For a small company recipient, the payer must be resident only in the UK or in a qualifying territory with a suitable tax treaty. For a larger recipient, the dividend must fall within an exempt class, such as distributions on non-redeemable ordinary shares or portfolio holdings of under 10%. Anti-avoidance rules also apply, so we review holdings before relying on the exemption.

Interest and other returns on loans, bonds, gilts and deposits are taxed as loan relationship credits. Credits are netted against debits to give a non-trading profit, which is taxed, or a deficit, which can be relieved. In a close investment-holding company the rate is 25%. Interest therefore tends to be the least tax-efficient income for the company, and investments are often chosen with that in mind.

A company pays corporation tax on its chargeable gains rather than capital gains tax, so a close investment-holding company pays 25%. There is no annual exempt amount for companies, and no indexation allowance for growth after December 2017. The substantial shareholding exemption can exempt the sale of a trading subsidiary where its conditions are met, but it does not cover gains on a portfolio of quoted shares or funds.

No on both counts. The £3,000 annual exempt amount belongs to individuals, personal representatives and certain trustees, not companies. Indexation allowance was frozen at December 2017, so there is none for assets bought after that date or for growth after it. A family investment company therefore pays tax on the whole gain, which is one reason long-term holdings of growth assets are often preferred.

A company with investment business can deduct the expenses of managing it from total profits, such as investment management fees. Capital expenses and expenses connected with investments held for an unallowable purpose are not deductible, and apportionment must be just and reasonable. Genuine salary or directors' fees can also be claimed as a management expense. Personal costs of the family are not allowable.

If a company holds units in a fund that, at any time in the accounting period, has more than 60% of its investments in interest-bearing and similar assets, the holding is treated as a loan relationship. It is taxed on a fair value basis, so annual movements in value are taxed or relieved as income, and distributions are not treated as exempt dividends. Mixed funds and bond funds should be checked before purchase.

They can. For a fund without reporting fund status, a company investor is taxed on distributions as income, and on sale the gain is an offshore income gain charged as income instead of a chargeable gain. Losses on sale are not recognised in that calculation. The rules are technical and have been amended recently, so we check the status of any offshore fund before it goes into the company.

Not usually. A passive holding company is ignored when counting associated companies only if it has no assets other than shares in its 51% subsidiaries, no income other than dividends it passes on, no chargeable gains and no management expenses. A family investment company holding investments will not meet those conditions. Associated company rules affect a family investment company that is not a close investment-holding company, or the trading companies it controls.

None have been published yet for the financial year from 1 April 2027. The rates for the year from 1 April 2026 are 25% on profits over £250,000, 19% on profits up to £50,000 and marginal relief in between. A close investment-holding company pays 25% regardless. We keep the position under review, and our calculators use the rates in force at the time and say which year they apply to.

A close company is one controlled by five or fewer participators, or by participators who are directors, which includes most family investment companies. It matters in several ways: it is the starting point for the investment-holding label, a loan made by the company to a shareholder triggers a tax charge, and certain transfers of value are apportioned to shareholders for inheritance tax. Exceptions are set out in the legislation.

The company pays a charge on the loan. For loans made on or after 6 April 2026 the rate is 35.75%, the dividend upper rate, paid nine months and one day after the end of the accounting period. It is refundable when the loan is repaid. For earlier loans the rate is 33.75%. Loans to shareholders are therefore avoided or managed carefully, particularly in a company where parents also act as directors.

As an illustration, profits taxed at 25% in a close investment-holding company and then paid out as a dividend to an additional-rate taxpayer at 39.35% leave an effective rate of about 54.5% (25% plus 39.35% of the remaining 75%). That is why a family investment company suits long-term reinvestment and loan repayments more than regular dividend income for high earners. Most dividends the company receives are exempt, which softens the first layer.

Sometimes. If interest and other non-trading credits are less than the matching debits, the company has a non-trading deficit that can be relieved against other profits, subject to the rules. A loss on selling investments is a capital loss and is set against chargeable gains, not income. Because family investment companies mainly produce exempt dividends and growth rather than taxable income, losses are rarely a significant issue, but they should be tracked.