Funding a FIC with a loan: how repayments work as tax-free income

Many family investment companies (FICs) are funded, at least in part, by a loan from the parents. It is popular because it gives the founders access to their money again, in a way that is not taxed as income. It also has limits, and they are worth understanding before you start.

How the loan works

You lend cash to the company. The company uses it to buy investments, and owes you the money. A company pays no corporation tax on money that a director or shareholder lends it, so the loan itself is not a taxable event.

Over time the company repays you. Repayments of the loan principal are a return of your own money, not income, so they are not taxed as income. No single statute says this in terms, but it is well-established practice, and the key is that the record shows clearly what is principal and what is not.

That makes the loan a flexible source of money. You can set a repayment plan, or take what you need when you need it, up to what you are owed and what the company can afford.

A simple example

You lend £1m to the company, and it invests the money. You agree to take £50,000 a year as repayments. Each payment is the return of your own money, and no income tax is due on it. After 20 years, if the company could meet every payment, the loan would be fully repaid. Our loan repayment planner lets you try different amounts and see the effect year by year, using assumptions you set.

Compare that with taking £50,000 a year as dividends, which would be taxable income. This is why a loan is often the first source of money from the company, and why dividends tend to come later.

What the loan does, and does not, do for inheritance tax

This is the point families most often misunderstand. The loan itself stays in your estate. It is an asset, a debt owed to you, valued at what is owed until it is repaid or given away. If you died with £700,000 of the loan outstanding, that £700,000 would be part of your estate.

What moves outside the estate is the growth on the investments the loan funded, if the growth shares belong to your children or a trust. So the structure is designed to cap what is in your estate and to move the growth, not to remove the money you lent. See freezer shares explained for how the share classes do that.

Money you take as loan repayments, and keep, is back in your estate again. If you spend it, it is gone as an asset. If you save it, it is taxable in the usual way. Taking repayments therefore reduces the value of the debt but does not by itself remove value from your estate.

Interest on the loan

You can charge interest, but you do not have to. If you do:

• the company can usually deduct the interest;
• it must deduct basic-rate income tax (20%) and pay it over, reporting quarterly on form CT61;
• you are taxed on the interest as income, and the savings tax rates are due to rise from 6 April 2027. Whether the CT61 deduction rate also moves is not yet confirmed.

Many families charge no interest, to keep things simple. Others charge it because they want to pay themselves a return. Either is workable, but it should be decided at the start and recorded.

Things to watch

The loan must be real. Keep a written agreement, minutes and accurate accounts. Repayments should be recorded against the loan, not mixed with dividends.

Do not lend what you may need elsewhere. The company can repay only what it has. If its investments fall, repayments may slow, and you cannot make it repay faster than it can.

Do not borrow personally to fund it and expect relief. Income tax relief on interest for a loan used to lend to a close investment-holding company is not available. That covers most investment FICs.

Do not let the company lend to you. A close company that lends to a shareholder can face a charge of 35.75% on loans made from 6 April 2026, refundable when the loan is repaid.

Do not release the loan lightly. Writing off a loan owed to you by the company is a gift to the company, not a potentially exempt transfer. It can be an immediately chargeable transfer.

Running the loan day to day

A loan only works if it is run with some discipline. In practice that means a few habits.

• Decide the repayment pattern in advance. It can be a fixed monthly amount or a flexible one, but the board should record it.
• Check the company can pay. Repayments come from dividends received, interest and sales of investments, so keep enough in cash or easily sold assets.
• Review it each year. Look at the balance outstanding, whether you are taking more or less than planned, and whether the plan still fits your needs.
• Keep the director's loan account tidy. Your accountant should see it as a loan from you to the company, not a mixture of repayments, expenses and dividends.

These points sound small. They are what keeps the position clear if HMRC ever asks, and what your executors will need if you die with the loan outstanding.

Loan or shares, or both?

Most families use a mix. Shares given away, or cash given to children who subscribe for shares, can take value out of the estate over seven years. The loan gives you a route back to the money. Property can also be transferred in, which brings capital gains tax and stamp duty land tax questions that our sister firm Property Tax Advisory (opens in a new tab) deals with.

For how funding fits with the rest of the structure, see funding a family investment company and extracting money from a family investment company. If you would like to talk through the numbers, book a free call. We respond the same working day.

This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Law as at 9 October 2026. Please speak to us before acting.