US/UK Family Investment Companies and limited partnerships

Family Investment Companies (FICs) have risen in prominence in UK estate planning as an alternative to trusts since 2006, when most trusts created by UK domiciliaries became less tax efficient.  

Tax changes which took effect in April 2025 are reinforcing this trend away from trusts and towards FICs for clients who are not (or not yet) long-term resident in the UK. The concept of ‘long-term resident’ has now replaced the old domicile test for UK tax purposes and broadly means those who have been UK resident for more than ten of the previous 20 tax years. See our article for further detail on this topic.

However, for clients connected with the US, FICs present a number of traps for the unwary.

Why can’t UK long-term residents use trusts?

Virtually all trusts created by UK long-term residents in lifetime exceeding the ‘nil-rate band’ (currently £325,000) face an immediate 20% Inheritance Tax entry charge and ongoing 6% charges on every tenth anniversary, as well as charges when assets leave the trust.

As a result, the use of trusts by UK domiciliaries has largely been restricted to:

(a) low value trusts not exceeding the nil-rate band;

(b) trusts of tax-exempt assets, such as interests in a trading business or agricultural assets or

(c) trusts taking effect on death under a will (which take effect after the estate has been subjected to Inheritance Tax, so don’t help reduce the tax exposure).

Trusts established by non-UK domiciliaries over their non-UK assets previously provided a potentially permanent shelter both from Inheritance Tax and from UK tax on rolled up trust income and gains. Most of these advantages have, however, fallen away since 6 April 2025 if the settlor is (or anticipates becoming) a UK long-term resident (though see our recent article discussing the Treaty opportunities for US citizens in the UK to create trusts within their first three years since leaving the US to shelter assets from Inheritance Tax).

Restrictions to Business Property Relief and Agricultural Property Relief taking effect on 6 April 2026 will further limit the appetite for new high-value trust structures in the UK (see our recent article).

FICs as alternatives

Many non-UK long-term residents are now following the trend of using FICs to achieve their goals of long-term wealth transition and custodianship.

By separating voting shares and economic shares, the founder may retain control of a FIC, including its directors and, therefore, its investments and distributions, while transferring the income rights and underlying capital value to the next generation. This separation between value and control is a key similarity with trusts, and the main reason that FICs are seen as an alternative to the traditional trust.

FICs in the UK also offer a more tax efficient roll up of income, with Corporation Tax rates being a maximum of 25%, compared to the 45% Income Tax rate applied to discretionary trusts.  This advantage may, however, disappear when income is distributed by dividend to UK residents, since another layer of tax is applied. This creates an incentive to roll up income within a FIC as far as possible.

Many clients from overseas choose to incorporate a FIC offshore to ensure that the FIC is not a UK asset for Inheritance Tax purposes. The gift of shareholdings will not then be within the scope of Inheritance Tax if the founder is not yet a UK long-term resident. This is especially attractive for founders who expect to leave the UK in future, at which point (once they cease to be long-term resident) only their UK assets will be within the scope of Inheritance Tax. However, careful planning is needed to ensure the FIC is not inadvertently exported (i.e. moves from being managed and controlled in the UK, to be managed and controlled overseas) leading to an exit charge.

FICs and US Estate Tax for non-resident aliens

While the US provides a generous estate tax exemption to its citizens and domiciliaries (£13.99million in 2025, rising to $15million in 2026), non-resident aliens are limited to an allowance of $60,000 unless extended by a double-tax treaty. However, the key difference is that, whereas US citizens and domiciliaries are subject to US estate tax on their worldwide estate, non-resident aliens are only taxable on assets sited in the US. Domicile requires a subjective intention to permanently reside in the US – merely being US resident is not sufficient, even for Green Card holders.

FICs (sometimes called Personal Investment Companies or PICs in the US) form a key part of both lifetime and succession structuring in the US. Both trusts and FICS can be used by non-Americans to hold US assets outside the scope of US Estate Tax. The FIC is likely a better option than a trust where the founder is or will become a UK long-term resident.

Where a person holds their US assets within a non-US company (known as a ‘blocker’ entity), they are no longer considered to own US assets. Instead, it is the company that owns US assets, and the founder simply holds a shareholding in a foreign company, which will be outside the scope of US Estate Tax so long as the founder is not a US citizen or domiciliary. This assumes that the corporation is properly managed with board meetings, shareholder resolutions and distribution or dividend policies in place. If not, there is a risk the US Inland Revenue Service will attempt to look-through the corporate entity and treat the shareholder as holding US assets directly.

FICS and limited partnerships (FLPs) for US citizens and residents

Foreign FICs are often unattractive for US persons (meaning citizens, Green Card holders and those who meet the ‘substantial presence test’ to determine US residence for Income Tax purposes). Income and gains received by a US person from a ‘Passive Foreign Investment Company’ (PFIC) are subject to anti-deferral taxes – dividends do not qualify for lower ‘qualified dividends’ rates and gains do not qualify for lower ‘long term capital gains’ rates. Furthermore, an interest charge is applied based on length of ownership of the PFIC.

From a pure US perspective, often the best response to avoid PFIC treatment is to file a ‘check the box’ election, after which the company is treated as transparent for US tax purposes. Check the box elections are often made during US pre-arrival planning to rebase assets before they fall into scope of US tax. The election avoids PFIC issues but also eliminates any US Estate Tax advantage (since the shareholder is now considered to hold the underlying assets directly for US tax purposes) and often causes double-tax risks since other countries (such as the UK) do not recognise the election and continue to treat the company as tax-opaque. For example, the UK may seek to tax dividends from a company to the shareholder, without any credit for US tax already paid since that US tax did not arise on the dividend but arose when the income was originally received by the company.

For US citizens resident in the UK who are primarily concerned with mitigating UK Inheritance Tax, family limited partnerships (FLPs) may offer a solution. FLPs avoid the double-tax risk as they are tax transparent in both the US and UK, so there is no tax mismatch. While FLPs do not offer the same income roll up advantages as FICs (since all income is taxed personally on the members in the year it arises), and they cannot act as blockers for estate tax, they do offer similar advantages of asset protection and a controlled transfer of wealth to the next generation.

Structure of a FLP

It is usually preferable to fund a FLP with cash or assets not standing at a gain since creating the FLP is a disposal for UK tax purposes, but not a gain recognition event for US purposes. This mismatch may lead to a future double tax risk when partnership assets or interests are later disposed of. However, if assets standing at a gain are to be used, with careful planning, it is possible to trigger a gain recognition event in the US to match the UK position.  

The founder of an FLP initially receives a ‘general partner’ interest and a ‘limited partner’ interest in exchange for funding the structure. The general partner may control FLP management, investment and distributions but has minimal economic rights. By contrast, the limited partner(s) holds the majority of the economic rights, including profits and capital distributions. These ‘limited partner’ interests may be transferred to the next generation, or to trusts or company structures for their benefit.

While the founder may naturally wish to retain the general partner interest, it is often preferable to transfer it to a trusted third party (e.g. a spouse) to ensure that the transfers of limited partner interests are taxed as ‘completed gifts’ for US purposes (i.e. ensuring the founder does not retain so much control over the partnership that the assets do not leave their estate for US purposes). If possible, the general partner interest will often be transferred into a company to limit liability.

These transfers of limited partner interests are gifts for the purposes of US Estate Tax and UK Inheritance Tax, but similar to minority interests in a FIC, value discounts may apply due to the limited market for such FLP interests. Future growth in value will, thereafter, arise outside of the founder’s estate.

A bespoke partnership agreement should be used much like a FIC shareholder agreement to give greater control and asset protection, such as by restricting the transfer of partnership agreements or admission of new partners.

The Birketts view

FICs are likely to be more common post April 2025 for those becoming long-term resident in the UK who might historically have used trusts as their primary vehicle for long-term estate planning. However, for US connected clients, FLPs are often the better solution to avoid exposure to costly US anti-deferral tax regimes.

Birketts has extensive experience in helping clients who have links on both sides of the Atlantic to navigate the complexities of US/UK tax and succession planning. For more information on how FICs and FLPs could help with your estate planning, please contact Tobias Gleed-Owen or Jane Johnson.